This Week In Securities Litigation

by Dorsey & Whitney LLP

The Commission prevailed in a jury trial this week against the City of Miami and its budget director in an action centered on three bond offerings. Cases brought by the agency this week also included: one against a firm and its General counsel for failing to properly accrue for, and establish, a reserve for a false claims action; a case against a national bank in connection with offerings of muni bonds for failing to make the proper disclosures; an action against the former president of a Chinese subsidiary of a U.S. firm for authorizing gifts to government officials, contrary to the FCPA; and a case against a private equity fund adviser centered on an improper expense allocation and a failure to give the funds the benefit of discounted legal fees.


Remarks: Chair Mary Jo White delivered the keynote address at the Security Traders Association 83rd Annual Market Structure Conference titled Equity Market Structure in 2016 and for the Future, Sept. 14, 2016, Washington, D.C. Her remarks covered a number of topics including Regulation SCI, enhancing transparency, the consolidated audit trail and algorithmic trading (here).

Remarks: Andrew Ceresney, Director, Division of Enforcement, addressed the Sixteenth Annual Taxpayers Against Fraud Conference, delivering remarks titled “The SEC’s Whistleblower Program: The Successful Early Years, Sept. 14, 2016, Washington, D.C.. His remarks reviewed the program and discussed the type of actions where whistleblower assistance is valued (here).

SEC Enforcement – Litigated Actions

The SEC prevailed at trial in an action against the City of Miami and its former budget director, Michael Boudreaux, centered on three bond offerings. Specifically, the jury returned verdicts in favor of the Commission as to each defendant on charges of violating Securities Act Section 17(a) and Exchange Act Section 10(b) while rejecting a defense of reliance on auditors as to each defendant. SEC v. City of Miami, Florida, Civil Action No. 1:13-cv-22600 (S.D. Fla. Verdict Sept. 14, 2016).

The action centered on three bond offerings in May, July and December 2009. In advance of those offerings the City distributed certain materials regarding its finances. The documents in part rely on the budget from then budget director Michael Boudreaux.

On May 29, 2009 the City issued about $53 million in Limited Ad Valorem Tax Bonds secured by certain pledged City ad valorem tax revenues. The offering materials contained the documents regarding the city finances. Subsequently, two additional bond offerings were made on the same basis.

Despite the representations in the documents distributed by the City, a series of transfers had been made from its Capital Projects Fund to its general fund that were not reflected in those materials. The transfers were concealed in the City records. The court has not set a date for a hearing on remedies.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 2 civil injunctive action and 4 administrative proceeding, excluding 12j and tag-along proceedings.

Conflicts: In the Matter of First Reserve Management, L.P., Adm. Proc. File No. 3-17538 (Sept. 14, 2016) is a proceeding which names the firm, a registered investment adviser and private equity fund adviser, as a Respondent. The Order alleges that the firm: 1) inappropriately allocated certain fees and expenses of two entities formed as advisers to a Fund portfolio company; 2) charged the Funds premiums for an insurance policy that did not entirely concern risks arising from the management of the Funds despite provisions in the pertinent documents stipulating that only premiums for coverage of Fund risks would be paid; and 3) failed to pass on a discount for legal fees that had been negotiated. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the matter the firm consented to the entry of a cease and desist order based on the Sections cited in the Order, and to the payment of a penalty of $3.5 million.

Newsletters: SEC v. Jesus, Civil Action No. 2:16-cv-06859 (C.D. Cal. Filed Sept. 13, 2016) is an action which names as defendants Manuel Jesus, his firm, Wealthpire, Inc. which operates investor alert services, and Robert Joiner, an editor for First Hour Trading, published by Weathpire. The complaint alleges that Mr. Jesus and his newsletter used adverting materials and websites to tout him as a stock investing prodigy. Beginning in January 2012, while using the name Manny Backus, defendant Jesus claimed to be making millions of dollars from trading, to be trading in the stocks recommended by his news letter and that he made all the stock picks. None of the representations were true. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23645 (Sept. 13, 2016).

Valuation: In the Matter of Portugal Telecom, SGPS, S.A., Adm. Proc. File No. 3-17534 (Sept. 13, 2016) is a proceeding naming the firm, a foreign private issuer based in Portugal, as a Respondent. In October 2013 Oi S.A., a Brazilian foreign private issuer entered into an agreement to acquire Portugal Telecom. At the time Portugal Telecom had an investment in the commercial paper of Rio Forte Investments, S.A. in the amount of €897. That investment was not disclosed until the next year. Rio Forte defaulted on the instruments, resulting in substantial looses. The terms of the merger were renegotiated and Oi returned the commercial paper. The Order alleges that Portugal Telecom had misrepresented the nature of its short term investments in its financial statements and had inadequate internal controls in violation of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding Portugal Telecom consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a penalty of $1,250,00.

Offering fraud: SEC v. North Hills Management, LLC, Civil Action No. 1:09-cv-01746 (S.D.N.Y.) is a previously filed action against the firm and Mark Bloom. The complaint alleges that from 2001 through 2007 the defendants raised over $30 million from about 40 to 50 investors. They were told that their money would be put into North Hills whose assets would be spread over several funds to ensure diversification and minimize risk. In fact much of the money was misappropriated by Mr. Bloom. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The court entered a final judgment against each defendant, prohibiting future violations of the Sections cited in the complaint. The court ordered the payment of over $30 million in disgorgement which is deemed satisfied by an order to pay restitution of the same amount in a parallel criminal action in which Mr. Bloom was sentenced to three years of imprisonment. The amount of a penalty will be determined on motion by the SEC. In another proceeding, Mr. Bloom was barred from association with any investment adviser and permanently suspended from appearing or practicing before the Commission as an accountant. See Lit. Rel. No. 23641 (Sept. 12, 2016).

Offering fraud: SEC v. Tycoon Energy, Inc., Civil Action No. 4:16-cv-00693 (E.D. Tex. Filed Sept. 9, 2016) is an action which names as defendants the company and Matthew Nerbonne. The complaint alleges that over a three year period, beginning in 2010, the defendants raised about $5.6 million from 232 investors, selling interests in Tycoon. Cold calls were used to attract investors. Offering materials touted the fact that two of the oil wells involved were projected to produce 300 to 400 barrels per day. The projections were baseless and, in any event, regulations precluded producing over 160 barrels per day. Maps used in the solicitations showed numerous wells in the area but omitted those that were dry or capped. A significant portion of the offering proceeds were misappropriated by Mr. Nerbonne. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The defendants partially resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. Disgorgement and penalties will be considered at a later date. See Lit. Rel. No. 23643 (Sept. 12, 2016).

Offering fraud: In the Matter of BOKF, NA, Adm. Proc. File No. 3-17533 (Sept. 9, 2016) is a proceeding which names the firm, doing business as Bank of Oklahoma, N.A., a national banking association, as Respondent. The firm has for years provided assistance to Christopher Brogdon in connection with a series of bond offerings that raised millions of dollars to build, purchase and renovate nursing homes and assisted living facilities. Mr. Brogdon is a defendant in a Commission enforcement action centered on those offerings. BOKF assisted, primarily through former senior vice president Marrien Neilson. Mr. Brogdon routinely drew down the debt service reserve funds to make debt service payments to investors without replenishing the fund as required by the offering documents. He also failed to make certain disclosures required on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access or to provide BOKE required annual financial statements for the offerings. BOKE knew the disclosures were required and that bond holders were to be informed about the draws but failed to take the appropriate action while facilitating new offerings. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Respondent resolved the proceeding, agreeing to implement a series of undertakings and consenting to the entry of a cease and desist order based on the Sections cited in the order. In addition, the firm will pay disgorgement of $984,200.73, prejudgment interest and a penalty of $600,000. See also SEC v. Neilson (D.N.J. Filed Sept. 9, 2016)(action based against bank officer based on same facts).

Accounting: SEC v. RPM International, Inc., Civil Action No. 16-cv-01803 (D.D.C. Filed Sept. 9, 2016) is an action against the firm and its general counsel, Edward Moore. The complaint alleges that beginning in 2011 the firm and its subsidiary were under investigation by the government for false claims. The firm failed to make any disclosure regarding the inquiry or have an accrual. The general counsel did not inform the firm about the loss estimates sent to the DOJ, that there was agreement to submit a settlement offer by a specified date and that prior to submitting the offer the overcharge estimates increased substantially. Mr. Moore also made material misstatements to the audit committee about the matter. Even after disclosure was made it was inaccurate. In 2014 the firm restated its financial statements for three quarters tied to the disclosures. The complaint alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The action is pending. See Lit. Rel. No. 23639 (Sept. 9, 2016).


Supervision: The regulator fined Ameriprise Financial Services, Inc. $850,000 for failing to properly supervise a registered representative. Over a two year period, beginning October 2011, the representative took the funds from five customer accounts belonging to his relatives. The firm failed to recognize a series of red flags, including the fact that the funds were being wired to an account affiliated with its representatives, or to have adequate supervisory provisions in place.


Enforcement actions: The Board announced the settlement of three enforcement actions based on independence violations. The settled actions involved:

1) Berkow, Schechter & Co. (Connecticut) and its partner Neil Berkow, CPA; the firm will pay a $15,000 civil penalty and cannot accept new broker-dealer clients for one year; Mr. Berkow was censured, will pay a fine of $5,000 and is barred from association with a Board registered firm for one year;

2) Roth & Company, P.C. (Iowa), will pay a $20,000 civil penalty and cannot accept a new broker-dealer client for one year; partner Jerome Carlson, CPA will pay a penalty of $10,000 and is bared for one year; and

3) Jackson, Howell & Associates, PLLC (Tennessee) will pay a penalty of $2,500. This is the only settlement in which the facts were not admitted.


In the Matter of Jun Ping Zhang, Adm. Proc. File No. 3-17535 (Sept. 13, 2016). Mr. Zhang was employed at Harris Corporation, both as vice president of technology and Chairman and CEO of CareFx China, a subsidiary of Harris. For a period of about one year after Harris acquired CareFx, Mr. Ping facilitated patterns and practices of giving gifts to Chinese government officials to obtain and retain business. During the period he directly authorized or indirectly permitted between $200,000 and $1 million in improper gifts. Bogus expense receipts covered the payments for the gifts. The Order alleged violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(5). To resolve the action Mr. Ping consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he will pay a penalty of $46,000.

Hong Kong

Position limits: The Hong Kong Securities and Futures Commission fined HSBC $2.5 million for regulatory breaches and internal control failures. Specifically, the firm exceeded position limits on the Hang Seng China Enterprises Index Futures and did not have sufficient procedures in place to ensure compliance. In assessing the fine the regulator took into account the remedial actions of the firm.

Trading: The regulator initiated a proceeding in the Market Misconduct Tribunal against Samantha Keung Wai Fun, former CEO of China AU Group Holdings Ltd, Wu Hsiu Jung and Chen Keochen for false trading in the shares of China AU. Between August 2009 and March 2010 China AU launched two fundraising exercises to fiancé the proposed acquisition of certain property. In between the two exercises Ms. Wu and Mr. Chen traded in substantial amounts of China AU shares, using 14 different accounts in various names while Mr. Keochen provided much of the funding. The SFC alleges that those charged sought to create a false or misleading appearance in the market place to support the fund raising.

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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