THIS WEEK IN SECURITIES LITIGATION (Week ending May 18, 2012)
The Commission issued a record number of trading suspensions for one day this week as part of an on-going effort to prevent microcap manipulations. A House Committee heard testimony from the Director of the Enforcement Division on its long standing policy of settling cases on a neither admit nor deny basis. The Commission and Citigroup filed their briefs with the Second Circuit defending the settlement rejected by the district court in SEC v. Citigroup.
SEC enforcement filed cases involving investment fund fraud, unregistered offerings, an international manipulation, a Chinese issuer and insider trading. The Commission also resolved a Regulation FD action.
Trading suspensions: The Commission suspended trading in the securities of 379 dormant companies on one day this week. This is the largest number of trading suspensions in one day.
Money market funds: Commissioners Luis Aguilar, Tory Paredes and Daniel Gallagher issued a statement regarding the publication by the IOSCO of its â€œConsultation Report of the IOSCO Standing Committee 5 on Money Market Funds: Money Market Fund Systemic Risk Analysis and Reform Options.â€ The Commissioners stated that the report does not reflect the views and input of a majority of the Commission. To the contrary, the majority of the Commissioners expressed their opposition to the publication of the report and urged its withdrawal.
Testimony: Robert Khuzami, Director, Division of Enforcement, testified before the House Committee on Financial Services (May 17, 2012). His testimony was titled â€œExamining the Settlement Practices of U.S. Financial Regulators.â€ It reviewed the Commissionâ€™s long standing policy of settling actions on a â€œneither admit nor denyâ€ basis as well as the recently instituted limited exception to that policy which applies when the defendant has admitted the facts in a parallel action (here).
SEC Enforcement: Filings and settlements
Statistics: This week the SEC filed six civil injunctive actions and no administrative proceedings (excluding follow-on and 12(j) actions).
Investment fund fraud: SEC v. Spangler, Case No. 2:12-cv-00856 (W.D. Wash. Filed May 17, 2012) is an action against Mark Spangler, the president of registered investment adviser The Spangler-Group, Inc. or TSG, and the adviser. Since 1998 the defendants have raised over $56 million in several private funds that Mr. Spangler created, according to the complaint. Investors were told that the funds would be invested in publically traded securities. Nevertheless, by 2011 about $47.7 million of the fundsâ€™ assets had been channeled into two private companies, one of which ceased operations in March 2011. From 2005 through early 2011 the two private entities paid TSG $830,000 in fees for financial and operational support not actually rendered. Advisory clients were not told about the fees. When the funds were not able to satisfy requests for redemption, the defunct company initiated state court receivership proceedings. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207 and Exchange Act Section 10(b). The case is in litigation.
Investment fund fraud: SEC v. Connolly (D.N.Y. Filed May 17, 2012) is an action against David Connolly. The complaint claims that from 1996 through December 2009 Mr. Connolly raised in excess of $50 million from over 200 investors who were told they were purchasing shares in at least 25 separate investment vehicles. Each vehicle was to own real estate. Beginning in 2006 Mr. Connolly told investors that their funds would not be co-mingled with those of other investors in other entitles. Nevertheless, the funds were in fact co-mingled and portions were diverted to his personal use. When the revenue from the property was not sufficient to make the required payments to investors, Ponzi like payments were made. The scheme crashed when additional investor funds could not be secured. Connolly Properties filed for Chapter 11 bankruptcy protection. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b).
Manipulation: SEC v. Geranio, Civil Action No. CV-12-4257 (C.D. Cal. Filed May 16, 2012) is an action against securities law recidivist Nicholas Geranio, his long time business associate Keith Field, and two entities he controlled, The Good One, Inc. and Kaleidoscope Real Estate, Inc. The defendants implemented a multistep international fraud which netted them about $35 million in ill-gotten gains. To carry out the scheme they: Located eight U.S. shell companies; prepared misleading business plans, marketing materials and websites for each issuer; installed management in each entity which included Mr. Field; manipulated the shares of each issuer using matched orders and wash sales to maintain the share price; recruited boiler room teams based in Spain who used high pressure tactics to sell Regulation S stock based on claims that the purchases were being made below the market price, although the fact that the share prices were manipulated was not disclosed; and had payment for the Regulation S shares forwarded to agents in the U.S. who divided the money among the scheme participants. The complaint alleges violations of Securities Act Sections 17(a) and Section 10(b). The case is in litigation.
Reg FD: SEC v. Presstek, Inc., Civil Action No. 10-1058 (E.D.N.Y. Filed March 9, 2010) is an action against Edward Marino, former CEO of Presstek, Inc. and the company. This week Mr. Marino settled with the Commission. The complaint alleges that on September 28, 2006, shortly after learning that the companyâ€™s performance was below expectations, he disclosed this fact to a the investment adviser for a large institutional investor of the company. The adviser caused the funds he advised to sell all of their company stock, avoiding a potential loss. The next day Presstek issued a preliminary announcement. It reported that quarterly financial performance was below prior estimates. The Commissionâ€™s complaint against the company and Mr. Marino alleged violations of Exchange Act Section 13(a) and Regulation FD and sought the entry of an injunction and a penalty as to each defendant. The company settled at the time the complaint was filed, consenting to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. As part of the settlement the company agreed to pay a $400,000 civil penalty. This week Mr. Marino settled with the Commission. In the civil injunctive action he agreed to the entry of a final judgment which imposed a $50,000 civil penalty. The settlement did not include an injunction. Rather, a separate administrative proceeding was instituted based on the same allegations as the civil injunctive action. To resolve that action Mr. Marino consented to the entry of a cease and desist order based on Exchange Act Section 13(a). In the Matter of Edward J. Marino, Adm. Proc. File No. 3-14879 (May 15, 2012).
Related party transactions: SEC v. China Natural Gas, Inc., Civil Action No. 12-cv-3824 (Filed May 14, 2012) is an action against China Natural Gas, Inc., based in the PRC, and its former Chairman and CEO, Qinan Ji. The case centers on the concealment of two related party transactions involving Mr. Ji and his son and the failure of the company to properly report a material acquisition in a timely manner. In January 2010 China Natural Gas made two short term loans totaling $14.3 million. The transactions were listed in filings made with the Commission as loans to third parties. One for $9.9 million was listed as being extended to Taoxiang Wang. The other, in the amount of $4.4 million, was recorded as having been extended to real estate company Shaanxi Junta Housing Purchase Co. Ltd. In fact the transactions were for the benefit of a company controlled by Mr. Jiâ€™s son. Neither the board, the investing public nor the auditors were told the true nature of the transactions by Mr. Ji. In addition, during the fourth quarter of 2008 the China Natural Gas acquired a natural gas company. Mr. Ji approved the transaction without consulting the board of directors. The transaction was not reported timely and properly in the filings for the company. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). The case is in litigation.
Insider trading: SEC v. Blystone, Case No. 1:12-cv-00774 (E.D. Cal. Filed May 10, 2012) is an action against Frank L. Bystone, former CEO of Tri-Valley Corporation or TIV.
In December 2009 TIV retained an investment banking firm to serve as a financial advisor in connection with a contemplated $10 to $15 million underwritten of securities. Subsequently, the firm altered the plan and decided to break the offering into three $5 million tranches. These changes were made because of adverse market conditions. Indeed, the firm only had commitments for $3.5 million from two of six prospective institutional investors who were contacted. Mr. Blystone was informed about these events through internal e-mails. Based on this information he concluded that the terms of the offering would be â€œonerous.â€ In March the by then retired former CEO received additional information about the proposed offering from a friend that the first sales would be soon.
Mr. Blystone sold shares of his former company on March 23, 2010 and April 5, 2010.
On April 6, 2010, TIV announced that it had entered into an agreement to sell shares to six institutional investors in a registered direct offering. The company raised $5 million, selling 3,846,154 shares at $1.30. The deal included warrants to purchase an additional 2,307,692 shares at prices ranging from $1.50 to $1.95. Following the announcement the share price dropped 38.6%, closing at $1.32. By selling prior to the announcement Mr. Blystone avoided losses of $36,267, according to the complaint which alleges violations of Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b). Mr. Blystone agreed to settle the case, paying $75,000 without admitting or denying the allegations.
Manipulation: SEC v. Global Development & Environmental Resources, Inc, Civil Action No. 8:08-CV-993 (M.D. Fla. Filed May 11, 2008) is a pump and dump action brought against a number of defendants including Philip Pritchard, Pietro Cimino and the company. This week the three defendants settled with the Commission, consenting to the entry of a final judgment which requires them too jointly and several pay disgorgement of $2,122,625 plus prejudgment interest. Messrs. Pritchard and Cimino were, in addition, each ordered to pay a civil penalty of $130,000.
Offering fraud: SEC v. Apartments America, LLC, Case No. SACV 12-754 (C.D. Cal. Filed May 11, 2012) is an action against Michael Stewart, John Packard and Randall Smith. According to the complaint, the defendants created Apartments America LLC to pool investor money for investment in apartment buildings. Investors were solicited through a website, cold calls, solicitation letters and newspaper advertising. Those materials touted the track record of the defendants. What investors were not told is that the statistics about the success of the defendants had been cherry picked from an earlier, similar project they conducted which was in bankruptcy after defaulting on $91.6 million in promissory notes held by 647 investors. The complaint alleges violations of Securities Act Sections 5 and 17(a)(1) and (3.). The case is in litigation.
In District Court in Miami, Florida the principle of Red Sea Management and Sentry Global Resources, Jonathan Curshen, was sentenced to 20 years in prison and ordered to forfeit $7.3 million based on his conviction by a jury in January 2012 in a pump and dump scheme. The companies, based in San Jose, Costa Rica, provided offshore accounts and facilitated trading in penny stocks. Mr. Curshen and others controlled the outstanding shares of CO2Tech which was used in the manipulation scheme. As part of the scheme, undertaken in January and February 2007, certain of the co-conspirators pumped the price of the stock with false press releases. Mr. Curshen and others then facilitated the dumping of the shares through the two companies, causing substantial investor losses. From 2003 through 2008 Mr. Curshen also operated Red Sea as a money laundering hub in Costa Rica that established bank and brokerage accounts in the U.S. and Canada under false pretenses and through nominee owners. The accounts were used to launder the proceeds of stock fraud. The other co-conspirators, including a New York lawyer, were previously sentenced to prison.
Investor alert: The agency issued a new investor Alert titled â€œNutraceutical Stock Scams â€“ Donâ€™t Supplement Your Portfolio With These Companies.â€ Nutraceuticals are products which claim to help people lose weight, get an energy boost, live longer or have other similar benefits. The Alert cautions against investment scams involving these products through email, tweets, blogs or message boards (here).
BrokerCheck: FINRA has enhanced its BrokerCheck capabilities to make it easier to access broker-dealer and investment adviser registration information (here).
The Securities and Futures Commission of Hong Kong completed 76 enforcement cases in the first four months of this year. This included the issuance of eight disciplinary notices and the commencement of twenty-one criminal matters and two civil cases. Included in this group were: two resolutions involving repurchase offers of Lehman Brothers related structured products totaling about $1,489 billion; an injunction freezing nearly $400 million in suspected insider dealing proceeds; the jailing of a broker for executing the manipulative instructions of a client; and obtaining high court orders to disqualify company directors for misconduct.
ABA Program: The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate? Tuesday June 5, 2012, 12:00 PM to 1:30 PM EST, Live in Washington, DC and webcast.
Moderators: Thomas O. Gorman, Partner, Dorsey & Whitney LLP, Washington, D.C. and Frank C. Razzano, Partner, Pepper Hamilton, LLP, Washington, D.C.
Panel: John D. Buretta, Deputy Asst. AG, Criminal Division, DOJ, Washington, D.C.; Charles E. Cain, Deputy Chief FCPA Unit, SEC, Washington, D.C.; France Chain, Senior Legal Analyst, Anti-Corruption Division, OECD, Paris, France; Prof. Mike Koehler, Butler University, Indianapolis, Ind.; Hon. Stanley Sporkin, Washington, D.C.; Greg D. Andres, Partner, Davis Polk, New York, New York; Eric Bruce, Partner, Kobre & Kim, New York, New York. Live Presentation from Washington, DC.
Co-hosted by Dorsey & Whitney LLP and Pepper Hamilton, LP at Penthouse at Hamilton Square, 600 Fourteenth St., N.W. Washington, D.C. Click here for more information (here)