This Week In Securities Litigation

Dorsey & Whitney LLP

Dorsey & Whitney LLP

Insider trading and microcap fraud actions were the focus of SEC Enforcement this week. The Commission filed two insider trading actions. One involved a spouse who misappropriated inside information about the acquisition of Whole Foods, Inc. by Amazon, Inc. A second involved an in-house attorney who traded on favorable financial results at his employer, SeaWorld.

The agency also filed four microcap fraud cases centered on a nationwide cold calling scheme implemented by unregistered brokers and involving the sale of unregistered securities. Finally, the Commission filed another audit frailer action against a small audit firm and two of its partners who largely ignored PCAOB standards.


Remarks: Chairman Jay Clayton delivered remarks titled Management’s Discussion and Analysis at SEC Speaks, Washington D.C. (April 8, 2019). The Chairman’s remarks briefly reviewed recent highlights such as the Supreme Court win in Lorenzo, the actions of Corp Fin to facilitate capital formation, the modernization project of IM and the increased transparency that is resulting from the efforts of Trading and Markets (here).

Remarks: Commissioner Elad Roisman delivered remarks titled Encouraging Smaller Entrants to Our Capital Markets at SEC Speaks, Washington DC (April 8, 2019). The Commissioner focused on issues which included encouraging market entry by firms, market structure, and the protection of investors (here).

Remarks: Commissioner Hester Peirce delivered remarks titled Secret Garden at SEC Speaks, Washington DC (April 8, 2019). Her remarks focused on the question of “secret law” such as no action letters, refusing to permit a registration statement to go effective with little or no comment and similar matters (here).

Program: The Commission is launching a new campaign to educate investors (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 5 civil injunctive actions and 3 administrative proceedings this week, exclusive of 12j and tag-along actions.

Muni advisor: In the Matter of Clear Scope Advisors, Inc., Adm. Proc. File No. 3-19143 (April 11, 2019). Respondent is a municipal advisory. From September 2017 through May 2018 the firm provided advisory services to two municipal entities. During that period the firm was not properly qualified in accord with MSRB rules because it did not have any municipal advisor professionals who had taken and passed the required qualifying Series 50 exam. By violating MSRB Rules G-2 and G-3 the firm also violated Exchange Act Section 15B(c)(1) which prohibits a municipal advisor from providing advice to a municipal entity in violation of MSRB rules. Respondent resolved the proceedings by consenting to the entry of a cease and desist order based the section cited and the related MSRB Rules. Respondent will also pay disgorgement of $20,000, prejudgment interest of $678.64 and a penalty of $5,000.

Insider trading: SEC v. Powers, Civil Action No. 6:19-cv-00664 (M.D. Fla. Filed April 9, 2019). Defendant Paul Powers was the Associate General Counsel and Assistant Secretary of SeaWorld. He has held those positions since 2011. Through his position at the firm and membership on the revenue committee Mr. Powers had a flow of material, non-public company information about the company through which he learned that attendance at the park and revenues were trending up at least by the second quarter of 2018. For example, a draft earnings release Mr. Powers received on August 1 reflected the increased numbers – EBITDA was up 59.1% compared to the prior year. Five days later the firm published a Form 8-K, dated August 6, 2018, disclosing the financial information. Four days before the filing – and weeks after Mr. Powers had been told in a letter by the company that the trading window was closed – the lawyer liquidated his stock account and purchased more company shares. Following the filing of the Form 8-K Mr. Powers had illegal trading profits of $64,645. The Commission’s complaint alleged violations of Exchange Act Section 10(b). That complaint is pending. See Lit. Rel. No. 24448 (April 10, 2019). Mr. Powers also pleaded guilty to one count of insider trading in the DOJ’s parallel criminal action. In the plea elocution he admitted the key facts detailed above. The date for sentencing has not been set.

Unregistered brokers/offerings: SEC v. Bevil, Civil Action No. 2:19-cv-00590 (D. Nevada Filed April 8, 2019); SEC v. Duke, Civil Action No. 3:19-cv-00857 (N.D. Texas Filed April 8, 2019); SEC v. Duncan, Civil Action No. 1:19-cv-00394 (W.D. Tex. Filed April 8, 2019); SEC v. Saccomanno, Civil Action No. 9:19-cv-80479 (S.D. Fla. Filed April 8, 2019). These actions charge Alexander Bevil, Richard Bohnsack, Daniel Broyles, Charles Davis, Michael Duke, Joel Duncan, Martin Lewis, Mark Parman, William Roth, Paula Sacomanno, Kenneth Shelton, Billy Ray Statham, Jr., Glenn Story, Dennis Swerdlen and Harold Wasserman with violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants were hired by Intertech Solutions to conduct cold calls in North America over a period of at least two years beginning in early 2014 regarding the shares of the company. No defendant was registered with the Commission as a broker. The securities were not registered. Eleven of the fifteen individuals charged settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of the sections cited in the complaints. Each settling defendant was also ordered to pay disgorgement and prejudgment interest. A penny stock bar was also entered as to each. See Lit Re. No. 24446 (April 6, 2019).

Insider trading: In the Matter of Tai-Cheng Yang, Adm. Proc. File No. 3-19134 (April 5, 2019). The action centers on the acquisition of Whole Foods Inc. by Amazon Inc. Mr. Yang is an engineer married to Wife. She has a close personal relationship with Family Member who had a position through which he obtained material non-public information about corporate transactions. Amazon and Whole Foods held preliminary discussions regarding a strategic transition in April 2017. By June 1, 2017 the two firms agreed that the food market chain would be acquired by Amazon at a price of $42 per share, paid in cash. On June 9, 2017 Family Member spoke on the telephone with Wife. Family Member explained that he would not be able to travel to attend the medical procedure of another family member. The Amazon – Whole Foods transaction was also discussed. Following the telephone conversation Wife communicated its substance to Mr. Yang. Less than one hour later Mr. Yang purchased 40 Whole Foods call options. Several days later he purchased an additional 10 option contracts. On June 16, 2017 Whole Foods announced a definitive agreement to be acquired by Amazon. The deal price was about $13.7 billion or $42 per share. The share price of the firm closed up about 29% at $42.68 per share. The value of Mr. Yang’s options increased by about $27,761.55. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceedings Mr. Yang consented to the entry of a cease and desist order based on the section cited in the Order. He also agreed to pay disgorgement of $27,761.55, prejudgment interest of $1,563.52 and a penalty equal to the amount of the disgorgement.

Audit/review deficiencies: In the Matter of KLJ & Associates, LLP, Adm. Proc. File No. 3-19132 (April 5 2019). Named as Respondents are the PCAOB registered audit firm, Kent Jensen, CPA, managing partner of the firm, and Ronald Burgmeier, CPA, also a partner in the audit firm. The proceedings center on 10 audits and 11 interim reviews for the years ended June 30, 2012 through December 31, 2015 and for the years ended September 30, 2014 through March 31, 2016. The work concerned five issuers. The shares for three of the firms traded on the OTC for a time. The shares for three of the issuers were registered with the Commission under Exchange Act Section 15(d) and two under Section 12(g) while one firm did not report. During the relevant period the audit and review work conducted by Respondents failed to comport with the applicable regulations of the PCAOB. Specifically, the firm and Mr. Jensen failed to obtain sufficient, competent, relevant evidential matter to evaluate management’s accounting estimates and to adequately document the procedures undertaken; to document required communications with the audit committee; to document the analytical procedures conducted; to prepare completion documentation; and to exercise due professional case. Mr. Burgmeier failed to comply with the requirements for engagement quality reviews. The Order alleges violations of Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. To resolve the proceedings each Respondent consented to the entry of an order denying them the privilege of appearing and practicing before the Commission with the right to apply for reinstatement after five years.

Criminal cases

Insider trading: U.S. v. Siva, No. 1:17 – cr-00503 (S.D.N.Y.). Rodolfo Sablon was sentenced to serve six months in prison and pay forfeiture of $923,566 along with a $5,000 fine based on his role in an insider trading scheme. Previously, Mr. Sablon pleaded guilty to one count of conspiracy to commit securities fraud and fraud. He was charged in a 54-count criminal complaint along with Michael Siva, Roberto Rodriguez, Jhonathan Zoquier and Jeffrey Rogiers. The charges included conspiracy, wire fraud and multiple counts of securities fraud and fraud in connection with a tender offer. Previously, each of the other defendants named in the criminal action pleaded guilty. The action was based on three tipping rings that received inside information from Daniel Rivas, formerly an employee at a bank in New York. Over a two-year period beginning in 2014 the ring generated about $5 million in trading profits. See also SEC v. Rivas, Civil Action No. 1:17-cv-06192 (S.D.N.Y. Filed August 16, 2017).

Hong Kong

False statement: Chan Wai Chue, former CFO and company secretary of DBA Telecommunications (Asia) Holdings Ltd., was convicted of making a false statement. Specifically, he stated that the firm’s financial statements were in accord with the applicable disclosure provisions. Yet at the time of the announcement an audit had not been completed as he knew. He was fined $60,000.

Insider dealing: The SFC commenced proceedings against Leung Pak Keung, a practicing solicitor, alleging insider dealing. Specifically, the regulator claimed that in December 2014 Leung was the legal advisor to Oceanwide Holdings (Hong Kong) Co. Limited regarding a proposed acquisition of a 44% stake in CASH Financial Services Group Ltd. He then purchased shares in the firm and sold them, yielding a profit of $45,300.


AML: The Financial Conduct Authority fined Standard Charger Bank about $138 million for inadequate AML controls in two high risk areas of the business. This is the second largest financial penalty for AML controls imposed by the FCA. The two areas of the bank identified were its UK Wholesale Bank Correspondent Banking business and the branches in the United Arab Emirates. Examples of the failings include: The opening of an account with 3 million UAE Dirham (over $650,000) in a suitcase with little evidence that the origin of the funds had been investigated; failing to obtain sufficient information on a customer exporting a product to 75 countries including two areas where there were armed conflicts which may have had a military application; and ignoring a series of red flags regarding a customer. The bank was also sanctioned by the U.S. for significant violations of sanctions. It paid OFAC a fine of $657 million.

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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