The Commission filed a series of cases this week which included: an action against a town attorney involved in 26 muni bond offerings in which critical financial information was concealed; another action involving a registered broker-dealer and investment adviser that failed to inform clients about available fund shares that did not carry loan charges; and a case against a pharmaceutical company employee for insider trading in the shares of his firm’s stock.
Remarks: Commissioner Robert J. Jackson delivered remarks titled Keeping Shareholders on the Beat: A Call for a Considered Conversation About Mandatory Arbitration, to CECP CEO Investor Forum, New York, New York (Feb. 26, 2018). His remarks discussed the need for securities class actions as an adjunct for SEC enforcement (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 6 civil injunctive case and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Muni bonds: SEC v. Genova, Civil Action No. 2:18-cv-01298 (E.D.N.Y. Filed March 1, 2018) is an action which names as a defendant Leonard Genova, the former town attorney and deputy supervisor of Oyster Bay, New York. The complaint centers on 26 securities offerings made between 2010 and 2015 and certain indirect guarantees given by the town to a long standing concessionaire. The guarantees were structured as indirect guarantees and given to the concessionaire after it was learned that the town could not give direct ones. The guarantees were not disclosed in the securities offerings. The complaint alleges violations of Securities Act sections 17(a)(1) and (3) and Exchange Act sections 10(b) and aiding and abetting violations of section 20(a) for the town’s violations which were charged in an earlier action. To resolve the action Mr. Genova consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed not to participate in any municipal securities offerings. See Lit. Rel. No 24059 (March 1, 2018).
Unregistered broker: SEC v. Muehler, Civil Action No. 2:18-cv-01677 (C.D. Cal. Filed Feb. 28, 2018) is an action which names as defendants: Steven Muehler, a securities law recidivist who is subject to cease and desist orders from the SEC and two states; Claudia Muehler, the wife of Steven; Koorosh Rahimi, who worked with Mr. Muehler at the Altavista companies; and Altavista Capital Markets, LLC; Altavista Private Client, LLC; and Altavista Securities, LLC, each controlled by Mr. Muehler. The scheme is an outgrowth of the one from the prior SEC action against Mr. Muehler. Mr. Muehler and the AtltaVista Companies agreed to assist small businesses raise money and to act as broker dealers in attempting to locate potential investors. In implementing this scheme Mr. Muehler and his firms made a series of false claims about their capitalization and registration with the SEC while forging documents and sending false emails. Mr. Muehler and his firms also attempted to raise money by selling bonds. The complaint alleges violations of Securities Act section 5(c) and Exchange Act sections 10(b), 15(a) and 15(b)(6). The case is pending.
Alternate shares – breach of duty: In the Matter of Ameriprise Financial Services, Inc., Adm. Proc. File No. 3-18381 (Feb. 28, 2018) is an action against the registered broker dealer and investment adviser. Over a five year period, beginning in January 2010, the firm sold certain retirement account customers fund shares that carried fees without telling them that they were eligible to purchase the same shares with the fees waived. This disadvantaged the customers while giving an advantage to the firm. The firm, as its remedial efforts, identified the clients involved who paid a total of $1,778,592.31. The firm voluntarily reimbursed that amount along with prejudgment interest to eligible customers. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. The firm will also pay a penalty of $230,000.
Microcap fraud: SEC v. Analytic Bio-Energy Corp., Civil Action No. 1:18-cv-00472 (D.D.C. Fled Feb. 28, 2018) is an action which names as defendants the firm, which presently has no operations, along with Douglas Murdock, its undisclosed control person, and Luiz Brasil, the former president of the company. Although Mr. Murdock directed the company for years, that fact was not disclosed. Rather, Mr. Brasil was the up front person. Mr. Murdock arranged a reverse merger with a Taiwanese company in 2013. The filings for the firm falsely stated that Mr. Brasil was in charge. Mr. Murdock used his control to conduct an illegal distribution of the firm’s shares over a period of about one year beginning in July 2013. In conducting the distribution Mr. Murdock fraudulently induced the transfer agent to issue over a million shares to him and remove the restrictive legends. The sales yielded Mr. Murdock about $340,000. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act section 10(b). To resolve the action the two individual defendants consented to the entry of permanent injunctions based on the sections cited in the complaint. Each is also barred from participating in any penny stock offering and serving as an officer or director of a public company. Financial penalties will be determined in the future on a motion brought by the SEC. See Lit. Rel. No. 24058 (Feb. 28, 2018).
Offering fraud: SEC v. Ameratex Energy, Inc., Civil Action No. 4:18-cv-00129 (E.D.Tex. Filed Feb. 27, 2018) is an action which names as defendants the Ameratex, Lewis Oil Company, Oil Corporation, Lewis Oil Company, Thomas Lewis, the CEO of each entity defendant, William Fort, Damon Fox and Brian Bull. The complaint alleges that the three entities and Mr. Lewis raised about $11.7 million beginning in February 2013 from 150 investors in 13 offerings. Investors acquired interests in limited partnership oil drilling and operations programs in Kentucky. In conducting the offerings misrepresentations were made about the use of investor proceeds, the financial statements, the wells, and other matters. Mr. Fox served as the accountant for several of the limited partnerships and diverted funds to the personal use of Mr. Lewis. He also prepared false tax forms. Overall about $2 million in investor funds were misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b) and 15(a). The case is pending. See Lit. Rel. No. 24057 (Feb. 28, 2018).
Insider trading: SEC v. Xie, Civil Action No. 2:18-cv-02779 (Feb. 27, 2018). Mr. Xie was an expert in health outcomes research at Merck & Co. Prior to 2015 one of Merck’s main competitors in the area of developing infectious disease drugs was Cubist Pharmaceuticals, Inc. In 2014 Merck considered acquiring Cubist. While the firm was evaluating the question, Mr. Xie analyzed certain Cubist products. Merck decided not to proceed. Nevertheless, in early October 2014 Merck’s CEO approached Cubist’s CEO regarding a deal. Eventually a deal was struck. On November 20, 2014 Merck’s Office of General Counsel sent a group email message to about 60 firm employees, including Mr. Xie, notifying them of the deal. The materials transmitted included a “No Trading Memo” for the code named project. After acknowledging the email Mr. Xie purchased 80 shares of Cubit stock. On December 8, 2014 the deal closed. Mr. Xie sold his shares for proceeds of $8,158.40. Later, during the staff’s investigation, he denied learning about the proposed acquisition until the night before it was announced. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the action, Mr. Xie consented to the entry of a permanent injunction based on the sections cited in the Order. He also agreed to pay disgorgement of $2,287, prejudgment interest and a penalty of $6,681, three times his trading profits. See Lit. Rel. No. 24056 (Feb. 28, 2018).
Offering fraud: In the Matter of Steven Zoernack, Adm. Proc. File No. 3-17157 (Feb. 26, 2018). Respondent Steven Zoernack was the investment adviser, managing member and sole owner of Respondent EquityStar Capital Management, LLC, a firm he formed in 2010. The adviser managed two small funds for which shares were sold, raising about $5.6 million. The offering materials were built on misrepresentations regarding the amount of assets under management, the results of their investment program which were back-tested rather than from actual transactions and omitted the criminal background of Mr. Zoernack. One of the funds actually secured a Morningstar five star rating for a period using similar false information. Finally, over a period of time, Mr. Zoernack made about $1 million in unauthorized withdrawals from the funds. The money was booked as loans. In fact the amounts were diverted to his personal use. As trading losses mounted the so-called loans, by 2014, became well over 50% of the NAV of each fund. The Order alleges violations of Securities Act section 17(a), Exchange Act section 10(b), and Advisers Act sections 201(1), 206(2) and 206(4). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Mr. Zoermack is also barred from the securities business and each Respondent is barred from affiliation with an investment adviser. Respondents were directed to pay, on a joint and several basis, $2,890,518.54 which will be satisfied by the forfeiture money judgment entered in U.S. v. Zoernack, No 17-cr-13 (M.D. Fla.). The Commission also chose to forego a penalty in view of Mr. Zoernack’s 60 month prison sentence.
Offering Fraud: SEC v. Ventre, Civil Action No. 8:18-cv-00323 (C.D. Ca. Filed Feb. 26, 2018) is an action which names as Defendants Steven Ventre, the founder and CEO of Defendant Dedicated Sound and Audio, Inc., and Eric Beltran who controls Choice Equity, a telemarketing entity. Over a period of about eighteen months, beginning in January 2013, the Defendants raised more than $4.6 million from 85 investors who purchased shares of Dedicated Sound, largely through the marketing efforts of Choice Equity. While the PPM claimed that only a 15% sales commission would be paid, in fact over $1.56 million in fees was paid or about 33.5%. About $870,000 of the commissions were remitted to Eric Lovy f/k/a Eric Beltran. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and Exchange Act Sections 10(b) and 15(a). The case is pending.
Manipulation: U.S. v. Sahachaisere, No. 13-cr-452 (E.D.N.Y.) is an action against Songkram Roy Sahachaisere and others. The action alleged an international pump-and-dump scheme in which the Defendants, and others, used a variety of mechanisms to fraudulently inflate the share price, including fake mergers, posting false information on message boards and bribing stock promoters. Following a five week trial the Defendant was convicted of conspiracy to commit securities fraud, conspiracy to commit wire fraud, two counts of wire fraud and one count of securities fraud. The Court sentenced Mr. Sahachaisere to serve 27 months in prison. Previously, six other persons were sentenced in connection with this matter. Three more defendants are awaiting sentencing.