The Commission settled another FCPA action centered on the efforts of a Chilean airline to resolve its labor issues. The agency also filed four offering fraud actions: one based on an internet fraud; a second centered on the sale of bonds for a resort complex; a third involving the sale of oil services equipment; and a fourth based on blank check companies. Finally, the SEC also brought two settled insider trading actions, one where the CFO of the firm being acquired traded and another where an accountant misappropriated inside information and tipped a securities professional.
Settlement: The Commission announced in a press release a settlement with State Street Bank and Trust Company for misleading mutual funds and other custody clients regarding hidden markups on foreign currency exchange trades. The firm will pay $382.4 million as part of a global settlement. In addition, the firm will pay $167.4 million in disgorgement to the SEC, a $155 million penalty to the DOJ and at least $60 million to ERISA plan clients under an agreement with the DOL. The SEC Order will not be filed until the court approves the settlements in the private class actions. The DOJ made a similar announcement.
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 5 civil injunctive action and 4 administrative proceeding, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Traffic Monsoon LLC, Civil Action No. 2:16-cv-00832 (D. Utah Filed July 26, 2016) is an action against the firm and Charles Scoville, its only member. Mr. Scoville began operating Traffic Monsoon in late 2014 as a combination internet traffic exchange and pay-per-click program. The firm is marketed as being very successful. Over 162,000 investors from around the world were solicited. Those investors were the source of virtually all of the firm’s funds, contrary to its claims. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). The court entered a freeze order on filing. The case is pending. See Lit. Rel. No. 23604 (July 28, 2016).
Offering fraud: SEC v. White, Civil Action No. 16-cv-02715 (N.D. Ga. Filed July 28, 2016) is an action which names as defendants Matthew White, Rodney Zehner, Daniel Merandi and several shell entities. For nearly a decade the defendants have tried to develop a resort and amusement park complex outside of Atlanta called Grand Empire Palace and Resorts. In 2013 they began selling corporate bonds to fund the project. While they had significant difficulty selling the bonds, about $5.6 million was raised. The defendants misappropriated the funds rather than using the money to purchase a portfolio of securities to secure the bonds as represented to investors. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
EB-5: SEC v. Luca International Group, LLC, Civil Action No. 23606 (N.D. Cal.) is a previously filed action against Luca International Group, LLC and other related entities. The complaint alleged that the defendants, including CEO Bingoing Yang and Lily Lei orchestrated a fraudulent offering scheme. The defendants portrayed their firm as highly successful and told investors that they would receive large returns. Some of the investors were Chinese citizens seeking a permanent green card through the EB-5 program. The Luca entities are in Chapter 11. The court entered a final judgment against the entity defendants, prohibiting them from violating Securities Act Sections 5(a) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). In addition, the firms will pay disgorgement equal to the Commission’s claim in bankruptcy which is $68.3 million. See Lit. Rel. No. 23606 (July 28, 2016).
Offering fraud: SEC v. McCollum, Civil Action No. 7:16-cv-00282 (W.D. Tex. Filed July 27, 2016). Defendant Jeffery McCollum formed JNL Oilfield Instruments, LLC to provide services to oilfield companies in West Texas. The business struggled, leaving him short of cash. Changing his business model, Mr. McCollum focused on purchasing used oilfield services equipment. To raise capital he began soliciting investors who were told if they purchased a specific part a quick profit could be made. From 2009 through mid – 2015 he raised over $12 million from about 30 investors. Parts were not purchased. Much of the money was misappropriated while portions were used to repay other investors. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The defendants resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. They also agreed to pay disgorgement and prejudgment interest in amounts to be determined later and a penalty of $160,000. See Lit Rel. No. 23603 (July 27, 2016).
Stop order: In the Matter of the Registration Statement of Sand International, Inc., Adm. Proc. File No. 3-17363 (July 27, 2016). The Order alleges that Respondent is a revoked Nevada corporation that claims to be headquartered in Zvirka, Ukraine. The firm failed to respond to a staff subpoena for documents. That constitutes a failure to cooperate, according to the Order. Accordingly, the Commission ordered the institution of a public administrative proceeding under Securities Act Section 8(d).
Insider trading: In the Matter of Vi Chen, CPA., Adm. Proc. File No. 3-17361 (July 26, 2016). Respondent Chen is a CPA licensed to practice in California. Prior to joining Oplink Communications Inc.she worked as an accountant for a number of publicly-traded firms. In August 2016 she became the controller of Oplink, a firm that sells optical networking components and subsystems. In August 2014 Koch Industries Inc. and Oplink executed a non-disclosure agreement following preliminary discussions. Over the following months the two companies engaged in due diligence. Ms. Chen first learned about the proposed transaction at an October 13, 2014 meeting with the firm’s CFO. She then worked on the due diligence, participating in meetings and calls with Koch representatives. Ms. Chen prepared deal related work product regarding her employer’s financial condition. During the period she purchased shares of her employer’s firm in brokerage accounts in the name of relatives. Following the deal announcement on November 19, 2014 the share price increased 14%. Ms. Chen liquidated the shares, realizing profits of $34,678.44. The Order alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the action Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, she will be denied the privilege of appearing and practicing before the Commission as an accountant with the right to request reinstatement after five years. She is also denied the privilege of serving as an officer or director of a public company for five year. Ms. Chen will pay disgorgement of $34,678.44, prejudgment interest and a civil penalty equal to the amount of the disgorgement.
Insider trading: SEC v. Melvin, Civil Action No. 12-cv-2984 (N.D. Ga.) is a previously filed action against Thomas Melvin and Michael Cain, a registered representative. The action alleged that Mr. Melvin traded on inside information furnished to him by his accountant regarding a corporate acquisition that had been misappropriated from a client. This week the court entered a final judgment against Mr. Cain permanently enjoining him from future violations of Exchange Act Sections 10(b) and 14(e) and ordering that he pay a penalty of $36,991.20. See Lit. Rel. No. 23601 (July 25, 2016).
Offering fraud: SEC v. Brennan, Civil Action No. 1:16-cv-00307 (E.D. Tenn. Filed July 20, 2016). The defendants in this action are James Brennan, Douglas Dyer and Broad Street Ventures, LLC. Beginning in 2008 Messrs. Brennan and Dyer, through Broad Street, continuously offered shares of stock in eight separate but similar companies known as Scenic City F101, Inc. through Scenic City F10 VIII, Inc. Each investment was apportioned equally among the Scenic City Companies. The Scenic City offerings were for blank check or shell companies that were to merge with a small, private firm that wanted to go public. A Form 10 registration statement was supposed to be filed with the SEC. The shares would be traded in the over-the-counter market. Total amount to be raised in the offering was $800,000. In the end each merged entity would be worth about $20 million and the shares would initially trade at about $1.00 per share. Collectively the transactions would give investors a return of over 800%. A series of false representations were made by the defendants to induce investors to purchase shares. Much of the investor money was diverted to the personal use of the defendants. The individual defendants also failed to disclose their regulatory history, including the fact that Mr. Brennan had been barred by FINRA. More than 240 investors purchased shares, paying millions of dollars to the defendants. The Commission’s complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). A freeze order has been obtained by the Commission. The case is pending. See Lit. Rel. No. 23600 (July 25, 2016).
Audit failure: In the Matter of EFP Rotenberg, LLP, Adm. Proc. File No. 317356 (July 22, 2016) names as Respondents the audit firm and partner Nicholas Bottini. The Order alleges that Mr. Bottini served as the engagement partner for the audit of the financial statements of Continuity X Solutions, Inc. for the fiscal year ended June 30, 2012. During the engagement the audit team failed: to appropriately respond to risks of material misstatement, to identify related party transactions, obtain sufficient audit evidence, perform procedures to resolve and properly document inconsistencies and to investigate management representations that contradicted other evidence and exercise due professional care. Respondents also failed to maintain adequate policies and procedures regarding documentation. The Order alleges violations of Exchange Act Sections 10A(a)(1) and 10A(a)(2) and Rule 2-02(b)(1) under Regulation S-X. To resolve the matter Respondents consented to the entry of a cease and desist order based on the Sections and rule cited in the Order. The firm also agreed to the entry of a censure and to implement certain undertakings, including not accepting any new audit clients registered with the Commission or for the purpose of registering securities with the agency for a period of twelve months. The firm will also retain an independent consultant for two years who will conduct certain reviews. The firm will pay a penalty of $100,000. Mr. Bottini will pay a penalty of $25,000 and is denied the privilege of appearing and practicing before the Commission as an accountant.
In the Matter of LAN Airlines S.A., Adm. Proc. File No. 3-17357 (July 25, 2016). LAN was a publically traded airline firm based in Santiago, Chili. LAN Argentina S.A. was a subsidiary of LAN during the period. Prior to 2004 the firm explored options for expanding into Argentina. In 2005 officials from the Argentine Transportation Secretary’s Office contacted LAN to determine if the company would be interested in purchasing Lineas Aereas Federales S.A. or LAFSA, a state owned airlines. While initially LAN declined, later in the year the vice president of business development met with the president of Argentina, the Transportation Secretary and other officials regarding LAFSA. Eventually LAN purchased a 49% stake in the airline – Argentinean law did not permit a foreign firm to own a controlling interest.
After purchasing LAFSA LAN faced a series of challenges one of which centered on the local labor unions which demanded large pay and benefit increases. The unions also threatened to enforce a so-called single function rule which would limit the work of each employee to one service. Strict application of the rule would require LAN to significantly increase its payroll.
In early 2006 a consultant who had initially contacted LAN before the LAFSA deal again offered his services. By this point the consultant was a Cabinet Advisor to the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. The consultant offered to negotiate directly with the unions. LAN’s CEO was informed that the consultant was well connected with the unions and could strike a deal.
The CEO approved the retention of the consultant, agreeing to payments totaling $1,150,000. At the time the CEO understood that “it was possible the consultant would pass some portion” of the money to union officials in Argentina. Subsequently, the consultant reached an oral agreement with the unions. LAN then entered into a consulting agreement calling for a study of airline routes for the payment of $1,150,000. The CEO approved the agreement and LAN made the required payments along with another to a firm owned by the consultant’s wife and son.
The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the action the firm undertook a series of remedial acts. The company entered into a deferred prosecution agreement with the DOJ and agreed to pay a criminal fine of $12,750,000. In view of that fine the Commission did not impose a penalty. LAN also consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will pay disgorgement of $6743,932 along with prejudgment interest.