The SEC prevailed on two summary judgment motions. One centered on a manipulation action. The other was against an attorney who facilitated a prime bank fraud.
The Commission also filed: An action against UBS tied to its failure to disclose certain factors which negatively impacted the value of structured notes marketed and sold by the firm; an insider trading case; six Rule 105 actions; and a financial fraud action.
Remarks: Commissioner Luis Aguilar delivered remarks titled “ The Important Work of Boards of Directors” at the 12th Annual Boardroom Summit and Peer Exchange, New York City (Oct. 14, 2015). His remarks focused on principles of good corporate governance including enhancing engagement with shareholders, the importance of oversight for crisis and risk management and ensuring that the board is an effective steward while noting that the SEC has rarely initiated actions against directors (here).
SEC Enforcement – Litigated Actions
Manipulation: SEC v. Farmer, Civil Action No. 4:14-cv-02345 (S.D. Tx. Filed August 14, 2014) is an action against Andrew Farmer, Charles Grob, Jr., Carolyn Austin, Baldemar Rios and Chimera Energy Corporation. The complaint alleged that from August 2011 through November 2012 the defendants engaged in a pump and dump manipulation scheme, deploying a series of false press releases touting a supposedly revolutionary new technology that enabled the production of shale oil and gas without the perceived environmental impact of hydraulic fracturing. As the stock price increased Mr. Farmer sold his shares, reaping at least $4.58 million in profits. The complaint alleged violations of Securities Act Sections 5(a) and (c) and 17(a) and Exchange Act Sections 10(b) and 15(d).
Last week the Court granted the Commission’s motion for summary judgment as to Mr. Farmer. The Court concluded that Mr. Farmer gained control of Chimara at nominal cost. At the time the firm had virtually no assets. Subsequently, he conducted an aggressive public relations barrage designed to push up the stock price despite the fact that the company was little more than a shell. Indeed, the so-called “non-hydraulic fracturing technology” touted by the company was little more than an illusion. Mr. Farmer made about $4.1. The Court concluded that Mr. Farmer violated Securities Act Section 17(a) and Exchange Act Sections 10(b). Remedies will be determined at a future hearing. See Lit. Rel. No. 2345 (October 9, 2015).
Prime bank fraud: SEC v. Smith, Civil Action No. 1:14-cv-192 (D.N.H. May 2, 2014) is an action against attorney Allen Ross Smith. Mr. Smith was charged with having participated in a scheme orchestrated by Swiss-based Malom Group AG that centered on a prime bank fraud. The underlying facts trace to 2009 when six individuals are alleged to have engaged in two schemes involving Malom, raising approximately $11 from investors, according to the court papers. Overall 30 persons put funds in the schemes.
Mr. Smith used his position as an attorney to facilitate the scheme and made several false statements in connection with offerings of securities. He also allowed his attorney trust account to be used to implement the scheme. Specifically, his account was used to collect about $2.4 million, acting as the “Paymaster.” The Court concluded that Mr. Smith violated the antifraud and registration provisions of the securities laws. A permanent injunction was entered against Mr. Smith. In addition, the Court directed, on reconsideration, that a penalty be paid equal to the disgorgement. See Lit. Rel. No. 23383 (October 8, 2015).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 3 civil injunctive cases and 9 administrative actions, excluding 12j and tag-along proceedings.
Rule 105: In the Matter of Auriga Global Investors Sociedad de Valores S.A., Adm. Proc. File No. 76145 (October 14, 2015) is one of six settled actions based on Rule 105. Each firm named in an administrative proceeding resolved the action by consenting to the entry of a cease and desist order based on Rule 105, Regulation M. In addition, each firm agreed to the following terms as part of the settlement: Auriga Global Investors, Sociedad de Valores, S.A.: Payment of disgorgement in the amount of $436,940.52, prejudgment interest and a penalty of $179,277.28; Harvest Capital Strategies LLC: Payment of disgorgement of $18,835, prejudgment interest and a penalty of $65,000; J.P. Morgan Investment Management Inc.: Payment of disgorgement of $662,763, prejudgment interest and a penalty of $340,689; Omega Advissors, Inc.: Payment of disgorgement of $68,340, prejudgment interest and a penalty of $65,000; and Sabby Management LLC: Payment of disgorgement of $184,747.10, prejudgment interest and a penalty of $91,669.95. One action was tied to a prior Rule 105 proceeding: In the Matter of War Chest Capital Partners LLC, Adm. Proc. File No. 3-15486 (September 16, 2013). The firm settled a Rule 105 case in 2013 but refused to identify earlier trades that might have violate the Rule. The current action is based on 2011 conduct. To resolve this case War Chest agreed to certain undertakings which include limiting its functions and operations as an investment adviser for one year by refraining from participating in any secondary or follow-on offerings and certifying its compliance to the staff. In addition, the firm consented to the entry of a cease and desist order based on the Rule and to a censure. The firm will also pay disgorgement of $179,516, prejudgment interest and a civil penalty of $150,000. The increased sanctions reflect the lack of cooperation by the firm.
Nondisclosure: In the Matter of UBS AG, Adm. Proc. File No. 3-16891 (October 13, 2015). In the wake of the financial crisis UBS began marketing Notes tied to the V10 index which was designed to exploit trends in the G10 foreign exchange rates. Beginning in late 2009, and continuing until the Fall of 2010, UBS issued about $190 million in V10 linked Notes. The sales were made as registered offerings. Overall there were eleven offerings. UBS officials in published articles emphasized the fact that the product was transparent. What investors were not told is that certain actions taken by UBS negatively impacted the product. Those included adding mark-ups, adding certain spread positions to its hedges and trading ahead. These transactions made the product less than transparent and systematic, the points used to sell it to investors. UBS failed to disclose the impact of the these transactions on the Index because it did not have an effective policy, procedure or process to make the individuals with primary responsibility for reviewing the offering documents and monthly reports aware of the conduct and its impact. As a result those documents were inaccurate. The Order alleges violation of Securities Act Section 17(a)(2). To resolve the proceeding UBS consented to the entry of a cease and desist order based on the Section cited in the Order. The firm also agreed to pay disgorgement of $10 million, prejudgment interest and a penalty of $8 million. $5.5 million of the disgorgement will be deposited in a segregated account for the benefit of the V10 investors.
Misuse of investor funds: SEC v. Bernath, Civil Action No. 3:15-cv-00485 (W.D.N.C. Filed October 13, 2015) is an action which names as a defendant Lonny Bernath, a hedge fund manager. From 2007 through 2011 Mr. Bernath caused the three funds he manages to extend loans to illiquid real estate and business ventures which he managed and in which he had invested. These investments were misrepresented to the fund investors and not disclosed to them until 2013. He also periodically wrote down the value of the investments to the detriment of fund shareholders. The complaint alleged violations of Advisers Act Sections 206(1), 206(2) and 206(4), Exchange Act Section 10(b) and Securities Act Section 17(a). To resolve the matter Mr. Bernath consented to the entry of a permanent injunction based on the Sections cited in the complaint and to an accounting. Financial remedies will be considered by the Court at a later date. See Lit. Rel. No. 23387 (October 15, 2015).
Failure to supervise: In the Matter of James Budden, Adm. Proc. File No. 3-16892 (October 13, 2015) is a proceeding which names as Respondents Mr. Budden, a one-time co-owner of registered investment adviser Professional Investment Management, Inc., and the other one time co-owner, Alexander Budden. The action centers on the actions of Douglas Cowgill who eventually purchased PIM from Respondents. Mr. Cowgill misappropriated about $840,000 of client funds. Eventually he settled a Commission enforcement action brought against him. Criminal charges were also filed against him. That action is on-going. Mr. Cowgill reported to Respondents from July 1981 through July 2013. No funding or training was given to Mr. Cowgill as PIM’s CCO. No steps were taken too ensure that PIM was in compliance with the federal securities laws after 2007. No steps were taken to ensure that Mr. Cowgill carried out his duties as CCO. In addition, when PIM was sold to Mr. Cwgill Respondents knew the firm was not in compliance with the Custody Rule. Based on this conduct the Order alleges failure to supervise. The Order alleges violations of Advisers Act Section 206(4). Each Respondent settled the proceeding, consenting to the entry of a cease and desist order based on the Section cited in the Order. James Budden was barred from the securities business with a right to apply for reentry after three years. He will pay a penalty of $125,000. Alexander Budden was also barred from the securities business with a right to apply for reentry after two years. He will pay a penalty of $75,000.
Insider trading: SEC v. van Steenberge, Civil Action No. 3:15-cv-01469 (D. Conn. Filed October 9, 2015) is an action which names as defendants Nicolas Zanen and Francis van Steenberge. Mr. Zanen is the vice president of trading at a subsidiary of Cheniere Energy, Inc. Mr. van Steenberge is his college friend. The two men entered into an agreement in 2011 to share inside information about Chenier with Mr. van Steenberge placing the trades. After trading in advance of four events the two men had $800,000 in trading profits. The complaint alleges violations of Exchange Act Section 10(b). Mr. van Steenberge settled with the SEC, consenting to the entry of a permanent injunction based on the Section cited in the complaint. Payment of disgorgement, prejudgment interest and penalties will be determined by the Court at a later date. See Lit. Rel. No. 23385 (October 9, 2015).
Financial fraud: In the Matter of David G. Derrick, Sr., Adm. Proc. File No. 3-16213 (October 9, 2015) is a proceeding which names as Respondents Mr. Derrick, the Chairman of SecureAlert, Inc., a marketer of tracking technology devices for adult probation and parole. James Dalton served as a Director of the firm from 2001 through late 2009. In 2007 Respondent made a deal with Distributor to take about $1 million in product. Distributor did not have to pay for the product unless sold. Messrs. Derrick and Dalton also guaranteed Distributor against loss. The revenue was reported in Commission filings. The related party transaction was not. Later Mr. Derrick misrepresented the nature of the transaction to the Corp Fin staff. Subsequently, Respondent reached out to a Third Party financing entity to secure payment. An arrangement was made where Third Party appeared to enter into a financing agreement but the $1 million in funding came from Messrs. Derrick and Dalton. When it was time for payment Distributor refused. A second, similar arrangement was then entered into in 2008. Following additional talks with Corp Fin the initial transaction with Distributor was reclassified. In 2009 the notes from Distributor were assigned to an entity owned by Respondent. Eventually the board of directors learned of the transactions, an investigation was conducted and Respondent self-reported. The Order alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. He is barred from serving as an officer or director and will pay a penalty of $232,500.
Documents: SEC v. Delaney Equity Group LLC, Civil Action No. 15-cv-81384 (S.D. Fl. Filed October 7, 2015) is an action against the registered broker dealer. The firm is alleged to have not produced documents sought by the Enforcement Division despite being given several extensions. The complaint alleges violations of Exchange Act Section 17(a)(1). The court entered a temporary restraining order. The case is pending. See Lit. Rel. No. 23384 (October 9, 2015).
Inspections: The Boarded issued a report titled “Inspection Observations Related to PCAOB ‘Risk Assessment.’” Risk assessments underlie audits. The report “reflects the Board’s concern about the number and significance of deficiencies related to the Risk Assessment Standards.” (here).
Insider trading: U.S. v. Zwerko (S.D.N.Y.) is an action in which Zachary Zwerko, formerly an analyst at a Pharma Company, pleaded guilty to one count of conspiracy to commit securities fraud and three counts of securities fraud. Mr. Zwerko obtained information about potential corporate transactions and acquisitions through his position with the company. He passed that inside information to CC-1 from 2010 to 2014. The trades based on the information yielded about $700,000 in profits. This week Mr. Zwerko was sentenced to serve 37 months in prison followed by three years of supervised release. He was also ordered to pay a fine of $50,000 and to pay forfeiture of $644,314.
Investment fund fraud: U.S. v. Murray (N.D. Cal.) is an action in which James Murray was charged with 22 felonies which include 16 counts of wire fraud, 4 counts of engaging in money transactions in criminally derived property, 2 counts of aggravated identity theft and a contempt of court charge. Mr. Murray claimed to be the investment advisor of Market Neutral Trading, LLC. The firm was supposedly audited by Jones, More & Associates. The audit firm does not exist. Mr. Murray used the two firms to defraud merchant banks and investors. As part of his overall scheme he devised fraudulent credit card transactions involving over $650,000 in sham transactions. He also raised about $2.5 million from investors through the use of misleading marketing materials which he supplemented with false account statements. In addition, Mr. Murray violated the Court’s bail order by using a computer which was prohibited. Following a three week trial a jury convicted Mr. Murray on all counts. Sentencing is scheduled for January 20, 2016.
Misuse client funds: TheAustralian Securities Investment Commission permanently barred Amanda Ritchie from the securities business. She had been an authorized representative at Magnitude Group Pty Ltd, a subsidiary of Westpac Banking Corporation. The action is based on findings that from late 2009 through mid-2014 Mrs. Ritchie transferred client funds without authorization and falsified documents to avoid detection.
Licensing conditions: The ASIC canceled the retail derivative issuers license of LSG Group Pty Ltd. The firm has failed since 2013 to comply with the conditions of its license which include filing financial statements and auditors reports, making other reports and reporting changes in control.
Fraud: The ASIC announced that Oliver Wood was convicted following an eight day jury trial of three counts of using his position as a corporate director dishonestly to gain an advantage. Specifically, he withdrew more than $29,000 from the company’s bank account for his personal use.
False credentials: The Securities and Futures Commission barred Ko Shu Chuan, formerly vice president of DBS Bank (Hong Kong) Ltd., from the financial services business for six years. An investigation determined that she fabricated a Bachelor of Economics degree and made false representations about her academic credentials.
False entries: Masashi Yonezawa, a former trader at Nomura International (Hong Kong) Limited, was barred from the securities business for 30 months by the Securities and Futures Commission. The action was based on false entries he made on the firm’s trading desk on three dates between March and May 2013 to conceal the risk exposure of the his trades. When questioned by the firm he made misrepresentations in an effort to conceal his conduct.
Financial fraud: The Serious Frauds office announced that Richard Clay was sentenced to ten years and ten months in prison while his business partner, Kathryn Clark was sentenced to two years in prison, suspended for two years with 300 months of unpaid work. The two were disqualified from being directors of a company for 15 (Mr. Clay) and 14 (Ms. Clark) years. Mr. Clay pleaded guilty previously to three counts of fraud while Ms. Clark pleaded guilty to three counts of fraud and two counts of forgery. Mr. Clay was alleged to be the directing force behind the financial schemes for Arck LLP and its accounts which defrauded investors of their funds, in some cases including their pensions and life savings. Ms. Clark cooperated against Mr. Clay after her plea. The schemes amounted to about £47.5 million.