This Week In Securities Litigation

by Dorsey & Whitney LLP

Insider trading was a key focus this week, aided in one case by the use of a deferred prosecution agreement to spur one of the underlying investigation. The Commission brought three insider trading cases centered on two mergers. In one case an insider on each side of the deal either tipped a friend or traded while in the other one insider traded. The Commission entered into a non-prosecution agreement with the tippee in the one deal which resulted in uncovering the tipper/insider.

The sprawling FCPA action centered around Petroleos de Venezuela spawned corruption charges against another executive this week. The corporate executive was charged with conspiracy and bribery charges. To date 17 individuals have been charged in the matter resulting in 12 guilty pleas.

SEC Enforcement – Filed and Settled Actions

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

Insider trading/non-prosecution agreement: SEC v. Lozuk, Civil Action No. 18 cv 1765 (S.D. Ca. Filed July 31, 2018). This action involves the settlement of an insider trading case and the use of a non-prosecution agreement which facilitated the underlying investigation. The insider trading case centers around the acquisition of Sequenom, Inc., a San Diego life sciences firm, by Laboratory Corporation of America or LabCorp, in a transaction announced on July 27, 2016. Defendant Robert Lozuk was the Senior Vice President of Commercial Operations at Sequenom. The transaction traces to June 8, 2016 when Sequenom’s board of directors instructed an investment bank to contact LabCorp and other companies to assess their interest in acquiring the firm. Sequenom subsequently entered into discussions with LabCorp. Mr. Lozuk became aware of the discussions by at least June 8, 2016. On July 20, 2016 representatives of the firm agreed on a deal price of $2.40 per share – the stock traded at under $1.00 per share. The day after the deal price was set Mr. Lozuk attended a concert with long time friend, Individual A. At the concert he told his friend about the proposed deal and too purchase 10,000 shares of the firm’s stock. When the deal announcement was made six days later, the share price increased 176% to $2.35 per share. Individual A sold his shares, reaping profits of $26,643.80. In March 2017 the staff issued an administrative subpoena to Individual A. He immediately contacted the staff and fully disclosed the facts and circumstances regarding his stock transaction including his conversations with friend Lozuk who was at the time unknown to the staff. Later Individual A entered into a non-prosecution agreement. The complaint alleges violations of Exchange Act sections 10(b) and 14(e). To resolve the action Mr. Lozuk consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, he agreed to the entry of a five year officer and director bar and will pay a penalty equal to the amount of Individual A’s trading profits. See Lit. Rel. No. 24222 (August 1, 2018). See also SEC v. Madan, Civil Action No. 2:180-cv-001121 (W.D. Wa. Filed July 212018)(action against Anup Madan, principal scientist at LabCorp who also leaned about the transaction through his discussed above and traded; settled with a consent to an injunction based on the same sections cited above and the payment of disgorgement in the amount of $14,023 and a penalty in the same amount). See Lit. Rel. No. 24221 (August 1, 2018).

Insider trading: In the Matter of Fred Tinker, Adm. Proc. File No. 3-18618 (July 31, 2018) is an action which names as a Respondent the former vice president of Finance at Synaptics Inc. In July and August 2015 Mr. Tinker learned that his firm was a potential acquisition target for a Chinese investment group. He purchased a total of 10,000 shares of the firm’s stock in his wife’s investment account. On September 30, 2015 Bloomberg reported that the company rejected an offer from a Chinese investment group but that talks continued. The stock closed up 24% the next day. Mr. Tinker had an unrealized gain of over $89,000. The Order alleges violations of Exchange Act section 10(b). To resolve the proceedings Respondent 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 $89,171.88, prejudgment interest of $8,506.64 and a penalty equal to the amount of the disgorgement.

Offering fraud: SEC v. Harbour, Civil Action No. 2:18-cv-002401 (D. Az. Filed July 31, 2018). Defendant David Harbour is a former FINRA member but has not been associated with a broker-dealer since January 2008. He has long been involved in the payday loan business. In 2014 Mr. Harbour began developing a Tribal Lending Entity. Under an agreement through one of his controlled entities, a line of credit for $10 million was extended to the Tribal Lending Entity at an annual interest rate of 16%. The borrower planned to enter into the online consumer lending business. Over the next two years Mr. Harbour entered into other business ventures. To raise capital for his various business entities, Mr. Harbour began soliciting investments using four controlled entities as he multiplied his business activities. Investments were sought from a series of investors based misrepresentations. Overall Mr. Harbour raised in excess of $2.4 million from a number of investors. He misappropriated over $1.5 million of the investor funds for his personal use. The complaint alleges violations of Exchange Act section 10(b) and Securities Act section 17(a)(2). To resolve the action Mr. Harbour consented to the entry of a permanent injunction. He also agreed to pay disgorgement of $1,535,000, prejudgment interest of $97,072 and a penalty of $1,535,000. See Lit. Rel. No. 24220 (July 31, 2018).

Manipulation: SEC v. Appel, Case No. 2:18-cv-03200 (E.D. Pa. Filed July 27, 2018). This action centers on the manipulation of the stock of three microcap issuers by securities law recidivist Defendant Howard Appel and his associates, primarily during the period 2012 through 2013, although the preparation for the fraudulent acts began as early as 2010. The schemes involved three issuers: Rio Bravo Oil, Inc., Red Mountain Resources, Inc., and Virtual Piggy, Inc. The manipulation of each firm’s shares was similar. First, Mr. Appel secured control of the company and, along with the associates, the stock of each firm. Second, trading was initiated and designed to create the appearance of activity in the market while pushing the price – the typical pump-and-dump emails and press releases do not appear to have been employed here. Rather, matched trades were used in conjunction with coordinated trading. Those transactions created the appearance of market activity and liquidity. Those actions were then tied to others that pushed up the price. Frequently Mr. Appel coordinated the activities of the associates through email. In other instances Mr. Appel traded through accounts of an associate. Overall Mr. Appel dominated the market in each stock through his holdings and those of the associates. The trading created an artificial price. The scheme yielded over $3 million in profits. The complaint alleges violations of Securities Act sections 17(a)(1) and (3) and Exchange Act sections 9(a)(1), 9(a)(2) and 10(b). The case is pending. See also U.S. v. Appel, No. 2:18-cr-00321 (E.D.Pa. Filed July 27, 2018). See Lit. Rel. No. 24219 (July 30, 2018).


U.S. v. Gonzalez (S.D. Tx.) is an action against Jose Gonzalez. The criminal complaint alleges that Mr. Gonzalez and others conspired to pay at least $629,000 in bribes to a former Petroleos de Venezuela S.A. or PDVSA official in exchange for business. The complaint charges conspiracy to violate the FCPA and paying bribes to a foreign official in violation of that statute. Mr. Gonzalez is one of 17 individuals to date to be charged in this conspiracy. To date 12 of those individuals have pleaded guilty. The case is discussed in more detail here.


Supervision: The European Securities and Markets Authority or ESMA concluded that there are deficiencies in the supervision of national regulators regarding Undertakings for Collective Investments in Transferable Securities engaging in efficient portfolio management techniques. ESMA also found that there are some good practices. A number of regulators stepped forward and informed ESMA that they intend to reform their practices. ESMA plans to follow-up on the findings of this peer review in 24 months.

Hong Kong

Takeover code: The Securities and Futures Commission censured and imposed a 24 month “cold shoulder” order (barred from the market for the period) on Liang Guosheng for breach of the mandatory offer that must be made under the Takeover Code. As of July 23, 2017 he did not own any shares of Silver Base Group Holdings but his family members did. He acquired a block of shares which raised the total amount held by the family to 45.87% from 43.83% — the group holdings went from just under to over the point where an offer was required. No offer was made as required. While he claimed to be unfamiliar with the Code those who transact in the markets have an obligation to know the rules.


The Securities and Exchange Surveillance Commission recommended to the Prime Minister and the Commissioner of the Financial Services Agency that an administrative penalty be imposed on Mitsubishi UFJ Morgan Stanley Securities Co. Ltd. The recommendation is based on trading in a manipulative manner with regard to the 10-year Japanese Government Bond Futures on August 25, 2017. At that time the firm placed orders without the intention to execute them for 6,253 units and sold 177 unites by placing a large amount of buy orders at the best bid price and below, and placed sell orders for 1,844 unites and bought 158 by placing a large amount of sell orders at the best offer price and above on the Osaka Exchange – overall a form of spoofing.

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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