The Commission prevailed in two litigated actions. In one the agency secured a favorable jury verdict in an action centered on misrepresentations made by an investment adviser who sought to move his book of business to a new entity. In the second, a jury returned a verdict in favor of the SEC in a microcap fraud action.
The SEC also brought actions based on: insider trading,; excessive brokerage charges; investment fund fraud; net capital violations; the sale of municipal bonds; and for aiding and abetting and covering-up an investment fraud.
SEC Enforcement – Litigated Actions
Misrepresentations: SEC v. Sage Advisory Group, LLC, Civil Action No. 1: 10-cv-11665 (D. Mass.) names as defendants the advisory and its principal, Benjamin Grant. The action centered around Mr. Grant’s efforts to transfer his brokerage clients to his newly formed advisory service, Sage. Prior to October 2005 Mr. Grant was a registered representative at broker dealer, Wedbush Morgan Securities in Los Angeles, California. He had a substantial book of business with over 300 customer accounts holding more than $100 million in assets. To induce his clients to move to his new firm he made a series of misrepresentations and failed to tell them that the new fee structure would largely benefit him. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4), 207 and 204A. The case was submitted to the jury on Counts based on Advisers Act Sections 206(1), 206(2), 207, 206(4)) and 204A. The jury returned a verdict in favor of the SEC on each except the Section 207 claim. See Lit. Rel. No. 23066 (August 13, 2014).
Microcap fraud: SEC v. BIH Corporation, Civil Action No. 2:10-cv-577 (M.D. Fla.).
The case named as defendants: BIH, a penny stock company which claimed to be a holding company specializing in the restaurant and hospitality industry; Edward Hayter who controlled BIH with Wayne Burmaster, Jr.; NorthBay South Corporation, supposedly an investment bank which acted as statutory underwriter by selling unregistered shares of BIH; Bimini Reef Real Estate, Inc., a firm which supposedly is in the real estate business and also acted as a statutory underwriter regarding BIH; Riverview Capital, Inc., also a statutory underwriter for BIH; Christopher Alstrom, the president of Bimini Reef; and Damian Guthrie, also involved in the distribution of BIH shares.
The complaint alleges a typical pump and dump manipulation scheme. It claimed that BIH presented a fictitious president and CEO on its website who was represented to be an accomplished entrepreneur. False press releases were issued such as one claiming that the firm had received an unsolicited offer to pay up to 20 cents a share for its stock and another that contained quotes from the fictitious president stating that shares were materially undervalued. Finally BIH shares were illegally distributed to North Bay South Corporation and Bimini Reef, Riverview Capital, all controlled by members of the scheme, yielding over $1.1. The complaint, filed in 2010, alleged violations of Securities Act Sections 5(a) and 5(c), each subsection of Section 17(a) and Exchange Act Section 10(b). The four day trial was only against Mr. Hayter. The SEC prevailed on each count.
SEC Enforcement –Filed and Settled Actions
Statistics: This week the Commission filed 2 civil injunctive actions and 4 administrative proceedings (excluding 12j and tag-along proceedings).
Insider trading: SEC v. Toth, Civil Action No. 1:14-CV-02616 (N.D. Ga. Filed August 13, 2014) is an action against Donald Toth, a certified public accountant, and James Nash, one of his clients. It centers on the tender offer for O’Charley’s, Inc. by Fidelity National Financial, Inc., announced on February 6, 2012. About two months before the tender offer announcement a Director of O’Charley’s told Mr. Toth about the pending transaction when seeking tax advice. Within days Mr. Toth purchased 5,000 shares of O’Charley’s stock. He also informed two of his clients, James Nash and Blair Schlossberg (charged in a separate action below). Both traded. Mr. Nash purchased 3,5000 shares of O’Charley’s stock. Mr. Schlossberg and his long time business partner Moshe Manoah jointly purchased 24,337 shares of stock. Following the announcement the share price increased about 42% giving Mr. Toth profits of $19,036, Mr. Nash profits of $13,959 and Messrs. Schlossberg and Manoah (also charged in a separate action) profits of $92,717. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Each trader settled, consenting to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. In addition, each defendant agreed to pay: Mr. Toth, disgorgement of $19,036 along with prejudgment interest and a penalty of $103,935.50; Mr. Nash, disgorgement of $52,500 along with prejudgment interest and a penalty equal to his trading profits; Mr. Schlossberg, disgorgement of $46,358 along with prejudgment interest and a penalty equal to his trading profits; and Mr. Manoah, disgorgement of $46,358.50 along with prejudgment interest and a penalty equal to his trading profits. See Lit. Rel. No. 23068 (August 14, 2014); see also SEC v. Manoah (M.D. Fla. Filed August 13, 2014) which names as defendants Moshe Manoah and Blair Schlossberg.
Excessive brokerage charges: In the Matter of Linkbrokers Derivatives LLC, Adm. Proc. File No. 3-16017 (August 14, 2014) is a proceeding which names the broker-dealer as a Respondent. The firm ceased acting as a broker in 2013 and will withdraw its registration at the conclusion of this action. From 2005 through early 2009 on over 36,000 customer transactions three brokers engaged in a scheme to charge customers false prices which concealed hidden markups or markdowns. The scheme is described here, in the description of the action previously brought by the Commission against the brokers (who have also now pleaded guilty to parallel criminal charges), Benjamin Chouchane, Marek Leszczynski and Henry Condron. The firm resolved the charges, consenting to the entry of a cease and desist order based on Exchange Act Section 15(c) and a censure. The firm will also pay disgorgement of $14 million.
Unregistered securities: SEC v. Garber, Civil Action No. 12 Civ. 9339 (N.D.N.Y.) is a previously filed action against Danny Garber, Michael Manis, Kenneth Yellin, Jorda Feinstein and a number of entities. The complaint initially alleged a scheme in which the defendants acquired shares of penny stock companies at significant discounts based on claims that they would hold them. Instead the unregistered shares were sold quickly without any exemption. The complaint alleged violations of Securities Act Sections 5(a) and 5(c) and 17(a) and Exchange Act Section 10(b). The second amended complaint dropped the antifraud charges. This week the Court entered final judgments against each individual defendant, enjoining them from violating Section 5 of the Securities Act and requiring them to pay a penalty of $25,000. The final judgment against Mr. Garber also included a penny stock bar. In addition, Messrs. Manis, Yellin and Feinstein were permanently enjoined from participating in any offering made pursuant to Rule 504 of Regulation D. Mr. Manis will pay disgorgement of $862,000 along with prejudgment interest; Messrs. Yellin and Feinstein will each pay disgorgement of $314,550 along with prejudgment interest. The entity defendants agreed to the entry of permanent injunctions based on Securities Act Section 5. See Lit. Rel. Nos. 23065 (August 13, 2014) and 22579 (Dec. 21, 2012).
Investment fund fraud: In the Matter of Keith MacDonald Summers, Adm. Proc. File No. 3-16014 (August 13, 2014) is a proceeding against the managing member of Tricoastal Capital Partners, LLC, an unregistered investment advisory firm. From mid-2009 through mid-2013 Mr. Summers raised about $4.7 million for the fund, primarily from U.S. investors. In raising the funds he misrepresented the amount of assets under management, the intended use of the funds and later concealed losses while misappropriating funds. Eventually he turned himself into Canadian authorities and pleaded guilty to criminal charges. This proceeding alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the proceeding Mr. Summers consented to the entry of a cease and desist order based on the Sections cited in the order. He also agreed to be barred from the securities business and pay disgorgement of $4,117,658.15 much of which is satisfied by the payment of restitution in the criminal case.
Net capital: In the Matter of Crucible Capital Group, Inc., Adm. Proc. File No. 3-16008 (August 8, 2014) is a proceeding which names as Respondents the registered broker dealer and its founder, Charles Moore. The proceeding alleges that Crucible not only failed to meet and maintain net capital but also took affirmative steps to conceal the fact that it had failed to comply with its obligations. The Order alleges violations of Exchange Act Sections 15(c)(3) and 17(a)(1). It will be set for hearing. Parallel criminal charges were filed by the U.S. Attorney in Manhattan.
In the Matter of The State of Kansas, Adm. Proc. File No. 3-16009 (Aug. 11, 2104) is the third action brought by the SEC against a state centered on the failure to disclose unfunded pension liabilities when selling bonds. Beginning in August 2009, and continuing for about the next year, the Kansas Development Finance Authority or KDFA raised $273 million through eight series of bonds offered on behalf of the State and its agencies. KDFA is an independent instrumentality of the state. Its primary purpose is to enhance the ability of the state to finance capital improvements. As a conduit issuer, the instrumentality offers securities on behalf of underlying issuers. The pension fund in the state, KPERS, is an independent instrumentality. It covers most government and public service employees. It also covers local school districts. Annually it prepares and releases an actuarial valuation and comprehensive annual financial report or CAFR. During the offering period KPERS was underfunded. At the end of 2008 its unfunded actuarial accrued liability was about $8.3 billion. It had a 59% funded ration. By contrast the tax supported debt of the state was $3.1 billion. The Official Statements for the eight series of bonds issued beginning in August 2009 included statements regarding the risk of non-appropriation. Information was also included regarding the amount of certain state indebtedness. There was no mention of the underfunded status of KPERS. At closing certificates were issued certifying that all material information was disclosed and correct.
Once the deficiencies in the disclosures came to light, Respondent undertook prompt remedial measures. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). The State resolved the proceeding by consenting to the entry of a cease and desist order based on the Sections cited in the Oder.
SEC v. Brown, Civil Action No. 1:14-cv-06130 (N.D. Ill. Filed August 8, 2014) is an action which names as defendants Alliance Investment Management Limited, or AIM, a Bahamian broker dealer registered with the SEC, and its president, Julian R. Brown. At its center is former investment management star, Nikolai Battoo. Mr. Battoo was a principal of BC Capital Group S.A. and BC Capital Group Limited. At his peak Mr. Battoo claimed to have about $1.5 billion under management. When his funds suffered huge losses during the market crisis and as a result of the Madoff Ponzi scheme, he covered it up with false account statements. Mr. Brown and AIM directly participated in, and substantially assisted, Mr. Battoo’s fraud. Throughout the period AIM represented that it was the independent custodian for PIWM investments. The custodian was supposed to safeguard the investments. In fact, after receiving investor proceeds AIM did not retain custody of them. Rather, at the direction of Mr. Battoo, the assets were forwarded to him. This facilitated the misappropriation of over $45 million, according to the complaint. In addition, Mr. Brown distributed false account statements prepared by Mr. Battoo. Mr. Brown and AIM profited from their work with Mr. Battoo. About $5 million was placed with the firm as a so-called investment by Mr. Battoo. In addition, Mr. Brown and AIM were paid significant fees. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See also SEC v. Battoo, Civil Action No. 12 C 7125 (N.D. Ill.); CFTC v. Battoo, Civil Action No. 12 C 7127 (N.D. Ill.); In the Matter of Larry C. Grossman, Adm. Proc. File No. 3-15617 (Nov. 20, 2013).
Unregistered broker-dealer: In the Matter of Fred Golt, Adm. Proc. File No. 3-16012 (August 12, 2012) is a proceeding against Mr. Gold alleging violations of Exchange Act Section 15(a). From April 2012 through February 2012, according to the Order, Mr. Golt solicited investors for Mutual Entertainment, LLC which was seeking to raise money for a motion picture. For his efforts in placing the securities through a team of sales people called “fronters” he was paid $337,825 in transaction based compensation. He was not a registered broker-dealer. The fronters were paid from those fees. Mr. Golt’s profits were negligible, although he would have been paid more had Mutual Entertainment been successful. To resolve the proceeding Mr. Golt consented to the entry of a cease and desist order based on Section 15(a) of the Exchange Act. He was also barred from the securities business and from participating in any penny stock offering. In addition, he a will pay a civil penalty of $25,000.
Alert: The regulator issued a warning to investors of Viral Disease Stock Scams (here).
Investment scheme: The Australian Securities and Investment Commission announced that Mark Letten was sentenced to serve five years and eight months in prison based on charges tied to a real estate investment scheme. Mr. Letten is a former director of LGH Holdings Ltd and the principal of the accounting firm Letten Pty Ltd. Between 1998 and 2010 more than 1,000 investor, most from Mr. Letten’s accountancy practice, placed more than $100 million in investment property schemes managed and promoted by Mr. Letten. The companies and unregistered schemes were wound-up with investors suffering losses of a least $67 million. Mr. Letten pleaded guilty to 27 charges including operating 21 unregistered schemes.
Insider trading: The ASIC announced that Fei Yu had been charged with eight counts of insider trading. The charges center on the take-over of Veda Advantage Limited by Pacific Equity Partners in 2007. Mr. Yu learned about the deal prior to the public announcement from his close friend, Bo Shi Zhu, an executive at Caliburn Partnership Ptd. which advised Veda. After learning about the deal he purchased securities and aided with the acquisition of contracts for difference. Mr. Yu made about $20,000 on the transaction. The maximum penalty for the charges is five years in prison. That maximum was recently increased to ten years. Previously, Mr. Zhu was sentenced to serve a term of two years and three months with a minimum of 18 months in prison.
Insider trading: The Securities and Futures Commission brought a proceeding against Salina Yu Lai Si, the former CEO of Water Oasis Group Ltd. The action, which charges insider trading, alleges that in January 2012 Ms. Yu was informed that H2O would terminate the exclusive distributorship of Water Oasis. Shortly after receiving the notice Ms. Yu sold all of her Water Oasis shares, avoiding a loss of over $280,000. The proceeding is pending.
Misrepresentations: The SFC suspended Chan Hung Nin for 15 months. The disciplinary action is based on the fact that he operated a client account as discretionary from early April 2011 through about mid-August 2012 when in fact it was not. He attempted to conceal this fact by having the client make false representations to the brokerage firm.