This Week In Securities Litigation

by Dorsey & Whitney LLP

The New York AG may have launched a new trend this week. Using the Martin Act, he filed a settled action against the largest coal producer in the nation alleging false statements regarding the firm’s ability to project the impact of climate change on its future business operations. Many of the statements were in filings made by the firm with the SEC. At the same time Exxon acknowledged receiving a subpoena from the Attorney General apparently based on the same kind of inquiry.

The SEC filed another suspicious trading action this week. In addition, it brought a market manipulation case against a foreign national who used Twitter to manipulate the share price of two firms. The SEC also filed an action against an audit firm based on a lack of independence and an offering fraud action.


Remarks: Commissioner Kara M. Stein delivered remarks titled “Surfing the Wave: Technology, Innovation, and Competition” at the Harvard Law School’s Fidelity Guest Lecture Series (Nov. 9, 2015). Her remarks focused on the impact of technology and innovation in the ways investment advice is delivered, its effect on the asset management industry and how investors navigate the changes (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 4 civil injunctive cases and 1 administrative proceeding, excluding 12j and tag-along proceedings.

Insider trading: SEC v. Zhou, Civil Action No. 15-cv-8796 (S.D.N.Y. Filed November 10, 2015). Defendants Zhichen Zhou and Yannan Liu reside, respectively, in Beijing and Hong Kong. Mr. Zhou is employed by, an online shopping company and is a webpage administrator for, a web-based peer-to-peer lending platform founded by his cousin, defendant Liu. Mr. Liu was employed as a venture capital and private equity associate at TPG Capital, LP, a global private equity firm, for a time. He continues to maintain a personal relationship with at least one professional of the firm, employed in the Beijing office. This action centers on two takeover transactions. The first involved the acquisition of MedAssets, Inc., a healthcare performance improvement company based in Georgia, by Pamplona Capital Management, LLC, a London and New York based investment manager. Shortly before the deal announcement Mr. Zhou purchased a total of 38,479 shares of the company at a cost of $885,377.94. The day after the deal announcement he sold the shares resulting in profits of $299,425.21. The second deal centered on the announcement on February 17, 2014 by Chindex International, Inc., a provider of healthcare services in China and Mongolia, that it had entered into a definitive merger agreement with Healthy Holdings, an affiliate of a private equity consortium composed of TPG Capital, Shanghai Fosun Pharmaceutical Group Co. and Roberta Lipson, the CEO of Chindex. Shortly before the deal announcement Mr. Zhou purchased 3,350 shares of Chindex. On February 25, 2014, one week after the deal announcement, he sold all the shares yielding profits of $7,504.38. Mr. Liu tipped his cousin, Mr. Zhou the complaint alleges on information and belief and received a benefit. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23403 (November 10, 2015).

Offering fraud: SEC v. Collins, Civil Action No. 3:15-cv-3620 (N.D. Tex. Filed November 10, 2015) is an action which names as a defendant Bobby Collins, an insurance agent who operated a retirement planning business known as Collins Insurance Companies in Iowa Park, Texas. Since 2010 Mr. Collins has been convincing elderly clients to invest in unsecured notes that promised outsized returns. The note sales generated over $4.6 million from 36 investors. The funds were to be invested in his business. In fact he diverted the money to his personal use. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Section 10(b). Mr. Collins resolved the action, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement and prejudgment interest in the amount of $573,234.16 and a penalty of $160,000. See Lit. Rel. No. 23404 (November 10, 2015).

Independence: In the Matter of Larry D. Liberfarb, P.C., Adm. Proc. File No. 3-16952 (November 9, 20154) is a proceeding which names as a Respondent the accounting and auditing firm which is registered with the PCAOB. Over a two year period beginning on January 1, 2010 the firm filed audited financial statements for the fiscal years ended January 1, 2010 through September 30, 2011 for 20 broker-dealer clients. The firm, however, was not independent at the time the filings were made. For example, for one engagement the audit firm assembled the broker’s financial data and prepared the financial statements, rendering it not independent. Nevertheless, the audit firm issued an audit opinion on the financial statements. The Order alleges violations of Exchange Act Section 17(a). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. The firm also agreed to implement certain undertakings including adopting policies and procedures. In addition, the audit firm will pay a penalty of $30,000.

Prime bank fraud: SEC v. Louks, Civil Action No. 15-cv-3455 (D. Minn.) is a previously filed action against James Louks and his firm FiberPop Solutions, Inc. The complaint details a scheme with the hallmarks of a prime bank fraud. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The defendants partially settled the action, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. Monetary issues will be resolved at a later time. See Lit. Rel. No. 23402 (November 9, 2015).

Market manipulation: SEC v. Craig, Civil Action No. 3:15-cv-05076 (N.D. Cal. Filed Nov. 5, 2015). James Craig resides in Dumfries & Galloway, Scotland. He is an active trader of equities and options. He also comments on stocks through various Twitter handles he created including @dunragit and @HedgeyeAC. In late January 2013 he created two Twitter accounts which mimicked those of well known stock analyst firms. On successive days he put out false tweets regarding two different stocks, sending their share price plunging. Mr. Craig traded, trying to take advantage of the artificial prices he created. He largely failed. On one stock he made a profit of $9. On the other his profit was $88. Investors, however, suffered losses totaling about $1.5 million. The false tweets also caused “tremendous intangible harm to the U.S. markets,” according to the complaint. The complaint alleges violations of Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 23401 (November 6, 2015). The U.S. Attorney’s Office filed parallel criminal charges.

Investment fund fraud: SEC v. Miller, Civil Action No. 15-cv-00519 (N.D. Ind. Filed November 5, 2015) is an action which names as defendants Earl Miller, the founder and manager of defendant 5 Star Capital Fund, LLC, an unregistered investment vehicle, and who controls defendant 5 Star Commercial, LLC which purports to be in the real estate investment business. Since the end of July 2014 the defendants have raised about $3.9 million from over 70 investors. During those offerings misrepresentations were made by defendants, including a false claim that Mr. Miller would not be paid compensation and regarding the nature of the investments that would be made. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission secured an temporary freeze order at the time the action was filed. See Lit. Rel. No. 23405 (November 12, 2015).

New York

Disclosure: In the Matter of Investigation by Eric T. Schneiderman, Attorney General of the State of New York of Peabody Energy Corporation, Assurance No. 15-242 (November 9, 2015). The NY AG has filed a “first-of-its-kind” settlement with the world’s largest coal producer, Peabody Energy Corporation. Using the Martin Act and statements made by the company in its filings with the SEC as well as other public statements, the NY AG charged Peabody with repeatedly making false and materially incomplete statements regarding climate change. Specifically, the action alleged that the firm repeatedly represented in SEC filings that it could not estimate the impact of climate change on future operations when in fact the firm had made estimates and obtained others from a consultant. It also claimed that the company misrepresented the position of the International Energy Agency in SEC filings and statements by only citing its most favorable estimates of future impact on the use of coal while omitting others. The action was resolved with the firm agreeing to make corrective disclosures and take other remedial steps.


False accounting: Following an investigation by the Australian Securities Investment Commission Peter Mavridis, the former CEO of S Central Group of companies was charged with 33 counts of obtaining financial advantage by deception and false accounting. Over a nine month period beginning in January 2009 he submitted duplicate and/or falsely inflated invoices to National Australia Bank Ltd. under a debtor factoring agreement. This resulted in the payment of about $4.8 million to the firm. Following a jury trial Mr. Mavridis was convicted on all counts and sentenced to serve 4 years and 8 months in jail with a non-parole period of 3 years.

Insider trading: The ASIC announced that Michael Hull pleaded guilty to three charges of insider trading in connection with the purchase of shares of Mac Services Limited, Giralia Resources NL and Jabiru Metals Limited between September 8, 2010 and February 2011. The inside information came from a close friend employed at the investment banking division of an internal financial institution.

Hong Kong

False statements: Lee Wah was convicted of making false statements in his licensing application. Specifically, he concealed his prior criminal convictions. He was ordered to pay a $15,000 fine and pay the costs of investigation by the Securities and Futures Commission.

Offering fraud: The SFC secured orders freezing the operations of Maxim Capital Limited. The firm had operated as an unlicensed investment firm. It solicited 130 investors and raised over $111 million. The investments were supposed to pay between 3% and 8%. While initially some payments were made to investors, they stopped. To date the SFC has recovered about $23.5 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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