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Thomas O. Gorman,
Dorsey and Whitney LLP
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    Happy Thanksgiving!

    November 25, 2014

    happy thanksgiving from secactions

    Three Principals of Adviser Settle SEC Charges Over Undisclosed Conflicts

    November 24, 2014

    The Commission filed another settled action based on undisclosed conflicts involving an investment adviser. In this proceeding Respondents, principals of the adviser, failed to disclose a fee splitting arrangement with an executing broker. In the Matter of Gavornki, Adm. Proc. File No. 3-16286.

    The proceeding centers around the relationship between registered investment adviser Concord Equity Group Advisers, LLC, Executing Broker and Tore Services, LLC, another broker-dealer. The owner of Concord is Concord Capital which is majority owned indirectly by the three Respondents, Lee Argush, Alan Gavornik and Nicholas Mariniello. Tore, formed in 2008, is also owned by Concord Capital. Mr. Argush was the CEO and CFO of Concord and Tore. Mr. Gavornik served as Concord’s executive managing director and CCO while Mr. Mariniello was Concord’s and Tore’s executive managing director and president.

    In 1999 Respondents initiated the Concord Platform. It was intended to guide Concord’s clients through customized portfolio research, design and selection. It also permitted the clients’ portfolio managers to monitor and rebalance investment portfolios. Those clients were largely small and medium sized banks and trusts. In addition, Concord offered access to sub-advisers that were incorporated into the Platform.

    Tore was formed to execute trades for clients and sub-advisers on the Platform. In 2008 Executing Broker contacted Concord regarding execution services. By October of that year an agreement was reached under which those who used the Platform would be referred to Executing Broker who would charge a commission of $0.04 to $0.06 per share. Of that amount $0.01 per share would remain with Executing Broker while the balance would be paid to Tore as a referral fee. An agreement captioned Commission Sharing Agreement for Referrals was executed.

    Under the Referral Agreement most of the client paid commissions went to Tore. Indeed, from the time the arrangement was entered into until 2011 when Concord was acquired, Tore obtained $1,005,000 in revenues from the arrangement – about 90% of the commissions collected by Executing Brokers.

    The terms of the Referral Agreement were never fully disclosed in the filings made by Concord with the SEC. For the first 12 months the arrangement was in place the firm’s ADV Part II contained no discussion of the arrangement. In an ADV Part II filed in November 2009 and again in March 2010 there was a reference to a referral fee arrangement involving Tore but the details regarding the agreement were not included. Likewise, and August 2010 filing, made after an examination by the staff, referenced the arrangement and noted that Tore “may” receive referral fees but again failed to detail the nature of the arrangement. Mr. Gavornik was primarily responsible for the filings. The Order alleges willful violations of Advisers Act Sections 204(a), 206(2) and 207.

    Respondents resolved the proceeding, with each consenting to the entry of a cease and desist order based on Advisers Act Section 206(2). The order as to Mr. Gavornik is also based on the other Sections cited in the Order. In addition, he agreed to the entry of an order barring him from serving in any capacity with an investment adviser or registered investment company for a period of twelve months and suspending him from participating in any penny stock offering for the same period. Respondents were also ordered to pay disgorgement of $41,005,000 and prejudgment interest on a joint and several basis and each was directed to pay a penalty of $150,000.

    SEC Files Settled Insider Trading Case In District Court

    November 23, 2014

    After bringing a series of insider trading cases as administrative proceedings in recent weeks, the Commission returned to its more traditional approach. The agency filed settled insider trading charges against a CEO and restaurant manager in federal district court. SEC v. Redmond, Civil Action No. 23138 (November 21, 2014).

    The action centers on the acquisition of GenTek, Inc., a manufacturer of chemical products and commercial engine components, by a subsidiary of investment funds managed by American Securities, through a tender offer announced on September 28, 2009. The defendants are William Redmond, Jr., a member of GenTek’s board and its CEO, and Stefano Signorastri, the manager of a Manhattan restaurant.

    Messrs. Redmond and Signorastri met in about 2004. Mr. Redmond was dining at Restaurant A which is managed by Mr. Signorastri. Subsequently, the two men became friends. Mr. Redmond frequently dined at Restaurant A. The two men also socialized on other occasions. During their periodic conversations Mr. Redmond frequently discussed business and personal matters. This was contrary to GenTek’s written policy which precluded discussing business matters except for a “legitimate purpose.” Here Mr. Redmond did not have a corporate or other business purpose for discussing firm business with the manager. By doing so, Mr. Redmond breached firm policy and his fiduciary duty. Mr. Signorastri knew that his friend was the CEO of GenTeck.

    GenTeck had engaged in discussions regarding a possible sale of the firm for a number of years. In 2008 there were discussions with two competitors regarding a possible business combination. A confidentiality agreement was executed and information exchanged. Mr. Redmond was involved in the discussions.

    Between August 19 and September 18, 2008 Mr. Signorastri purchased 10,000 shares of GenTeck in accounts he opened at the time. He had never purchased shares in the firm and this investment was significant for him compared to his income. Individual A, who worked at Restaurant A, purchased 100 shares of GenTeck after Mr. Signorastri furnished him with material non-public information obtained from Mr. Redmond.

    By the end of September 2008 the negotiations terminated. Mr. Signorastri continued to hold his shares in the firm.

    Subsequently, GenTeck entered into negotiations with American Securities which eventually resulted in the tender offer:

    • June 19, 2009: American Securities delivered a preliminary offer to the company;
    • July 7: The offer was increased from $30 to a range of $35 to $38 per share;
    • In July 2009 Mr. Redmond told the manager that there were merger negotiations;
    • Between June 19, 2009 and the end of September Mr. Redmond dined at Restaurant A seven times;
    • July 17, 2009: Mr. Redmond met with representatives of American Securities regarding their proposal at Restaurant B where Individual B worked; after the meeting, Mr. Redmond told Individual B that his lunch meeting was with people who wanted to buy the company;
    • July 21, 2009: A confidentiality agreement was executed following another meeting;
    • July 29, 2009: American Securities revised its proposal, offering $37 per share;
    • July 30, 2009: Individual B purchased 170 shares of GenTeck stock;
    • August 3, 2009: Mr. Redmond informed the board that Goldman Sachs may be interested in serving as the firm’s financial adviser;
    • From August 3 to August 5 Mr. Redmond called Mr. Signorastri each day.
    • August 6, 2009: American Securities increased its offer to $38 per share and GenTech received an offer from a new bidder;
    • August 6, 2009: Mr. Signorastri purchased 2,000 additional shares;
    • August 7, 2009: GenTech rejected the offer from the new bidder and gave American Securities a 30 day exclusivity period;
    • August 11, 2009: Due diligence began along with negotiations regarding the final documents;
    • September 21: American Securities advised Mr. Redmond that due diligence was largely complete;
    • September 23: Mr. Redmond spoke with the manager while dining at the establishment he managed;
    • September 25: Individual A purchased 250 additional shares; and
    • September 28, 2009: The transaction was announced.

    After the transaction was announced, the share price closed up nearly 40%. On October 30, 2009 Mr. Signorastri tendered his shares as did Individual A. They had profits of, respectively, $164,260 and $3,672. Individual B had trading profits of $2,490.

    The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). To settle the charges, Mr. Redmond agreed to pay disgorgement of $149,139 representing the illicit profits of the two traders and most of the trading profits by Mr. Signorastri. Mr. Redmond will also pay prejudgment interest, a penalty of $64,821 and be barred from serving as an officer or director for five years. Mr. Signorastri agreed to pay the remaining disgorgement of $21,283 and a penalty of $59,609. See Lit. Rel. No. 23138 (November 21, 2014).

    This Week In Securities Litigation (Week ending November 21, 2014)

    November 20, 2014

    The Commission filed another settled FCPA action this week. The proceeding named two U.S. citizens living abroad as Respondents. The DOJ issued an Opinion discussing successor liability.

    The DC Circuit agreed to rehear the suit which challenged the SEC’s conflict minerals rules issued under Dodd-Frank. The Court will consider the only issue in which it had ruled against the SEC. That question focused on a First Amendment issue regarding a portion of the rule which required the publication of certain information. The issue will be reconsidered in view of another recent ruling by the Circuit Court.

    Finally, SEC enforcement brought actions centered on: a misappropriation claim; three cases involving stock manipulation claims; and an based on an action offering fraud.

    SEC

    Trading suspension: The Commission suspended trading in Bravo Enterprises Ltd., Immunotech Laboratories Inc., and Myriad Interactive Media Inc., each of which touted operations related to the prevention or treatment of ebola (here).

    Rules: The SEC Adopted Rules to Improve Systems Compliance and Integrity designed to strengthen the technology infrastructure of the markets (here).

    Staff accounting bulletin: The SEC Staff Released an Accounting Bulletin to Update Guidance on Pushdown Accounting (here).

    Remarks: Commissioner Kara M. Stein delivered remarks at the 15th Annual “Live from the SEC” Conference, Washington, D.C. ( November 13, 2014). Her remarks focused on capital formation (here).

    Remarks: Andrew Ceresney, Director, Division of Enforcement, addressed the 31st International Conference on the Foreign Corrupt Practices Act, National Harbor, Maryland (November 19, 2014). His remarks focused on prosecutions against individuals, the importance of compliance, cooperation and the statutory concept of “anything of value” under the Act (here).

    Remarks: Norm Champ, Director of Investment Management, addressed the ALI 2014 Conference on Life Insurance Company Products, Washington, D.C. (November 13, 2014). His remarks included comments on the on-going disclosure review, alternative mutual funds, the risk and examinations office and disclosure for mutual funds (here).

    CFTC

    Remarks: Chairman Timothy G. Massad addressed the CME Global Financial Leadership Conference (November 14, 2014). In his remarks the Chairman discussed the importance of U.S. leadership in regulatory reform, his basic core principles, the cross boarder challenge and cybersecurity (here).

    Remarks: Commissioner J. Christopher Giancario addressed the U.S. Chamber of Commerce with remarks titled Re-Balancing Reform: Principles for U.S. Financial Market Regulation in Service to the American Economy (November 20, 2014). His remarks focused on six key principles for financial market reform (here).

    SEC Enforcement – Filed and Settled Actions

    Statistics: This week the SEC filed 5 civil injunctive action and 1 administrative proceedings, excluding 12j and tag-along-actions.

    Market access: In the Matter of Wedbush Securities Inc., Adm. Proc. File No. 3-15913 (November 20, 2014) is a settlement in a previously filed action which named as Respondents the broker dealer, Jeffrey Bell, the firm’s EVP for the Correspondent Services Division, and Christina Fillhart, a senior V.P. in the same division. The initial proceeding alleged violations of the market access rule as detailed here. Each Respondent resolved the claims. The firm admitted to violating the federal securities laws and to the facts set forth in a nine page addendum attached to the Order which essentially outline the action. It will also implement certain undertakings. The individuals resolved the claims without admitting or denying the allegations alleged in the Order except as to the jurisdiction of the Commission. Wedbush consented to the entry of a cease and desist order based on Exchange Act Sections 15(c)(3) and 17(a) and to a censure. In addition, the firm agreed to pay a penalty of $2,447,043.38. Mr. Bell consented to the entry of a cease and desist order based on the same Sections. He also agreed to pay disgorgement of $25,000, prejudgment interest and a penalty of $25,000. Ms. Fillhart consented to the entry of a cease and desist order based on the same Sections. She also agreed to pay disgorgement of $25,000 along with prejudgment interest. A civil penalty was not imposed based on financial condition.

    Misappropriation: SEC v. Scipione, Civil Action No. 8:14cv2886 (M.D. Fla. Filed November 18, 2014) is an action which names as a defendant Albert Scipione, previously a registered representative, and the managing member of Traders, Café, LLC. Beginning in December 2012, and continuing until October 2013, Mr. Scipione and his business partner, Matthew Ionne, solicited investors to establish accounts at Traders Café. The purpose was to day trade in the hopes of making profits. Investors were assured that their funds would be held in segregated accounts and used only for day trading or other related specific business purposes. Investors deposited about $367,000 with Traders Café. In addition, one investor put $150,000 directly into the business. From the beginning, customers encountered problems and many cancelled their accounts. Mr. Scipione and his partner diverted much of the investor money to their personal use. Eventually less than $1,200 remained. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. Previously, Mr. Ionno settled charges with the Commission. The U.S. Attorney’s Office filed parallel criminal charges against both men. Mr. Scipione has pleaded guilty. See Lit. Rel. No. 23136 (November 19, 2014).

    Manipulation: SEC v. Forum National Investments Ltd., Civil Action No. 5:14-cv-02376 (C.D. Cal. Filed November 18, 2014) is a case which names as defendants the company, Daniel Clozza, its CEO, and three penny stock promoters, Robert Dunn, William Anguka and Ahmad Ghaznawi. Forum National initially sold memberships in a travel club and chartered its yacht and later was engaged in the life settlement business. By September 2011 Forum was experiencing significant financial difficulties. In November Mr. Clozza sought introductions to internet promotional companies through which he met the other defendants who were retained to assist in promoting the company. Subsequently, Messrs. Anguka and Ghaznawi disseminated web pages and internet news letters touting Forum’s business prospects. Despite the fact that there was no basis for the claims, the stock price, quoted in the pink sheets, climbed rapidly from about $0.35 in May 2012 to over $2.00 per share in June 2012. Mr. Dunn, along with relatives and associates of Mr. Clozza, sold more than one million shares of Forum stock, profiting from the inflated, artificial price. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 13(a) and Securities Act Section 17(b). The Commission also initiated an administrative proceeding against Forum under Exchange Act Section 12(j). The actions are pending. See Lit. Rel. No. 23135 (November 19, 2014).

    Manipulation: SEC v. Noel, Civil Action No. 3:14-CV-5054 (N.D. Cal. Filed November 17, 2014) names as a defendant Joseph Noel, the CEO of YesDTC Holdings, Inc., a firm he created through a reverse merger in 2009. In February 2009 Mr. Noel formed Sonoma Winton, LLC and appointed his daughter as the sole member, although he continued to control the entity. During 2011 Mr. Noel is alleged to have conducted two pump-and-dump schemes. In each of the schemes Mr. Noel prepared and had issued false and misleading press releases touting the business of the firm which supposedly specialized in direct-to-consumer marketing. In each instance the share price spiked upward significantly. In each instance Mr. Noel secretly sold shares through Sonoma. Overall he netted about $300,000 in profits from the two schemes. The complaint alleges violations of Exchange Act Sections 10(b) and 16(a), and Securities Act Sections 5(a), 5(c) and 17(a). The action is pending. See Lit. Rel. No. 23134 (November 17, 2014).

    Manipulation: SEC v. Thompson, Civil Action No. 14 CV 9126 (S.D.N.Y. Filed November 17, 2014) is an action which names as defendants: Anthony Thompson, a penny stock promoter who controlled OTC Solutions LLC; Jay Fung, a penny stock promoter who controlled Pudong, LLC; Eric Van Nguyen, a penny stock promoter who controlled Golden Dragon Media, Inc.; John Babikian who operated a penny stock promotion business primarily through the web site AwesomePennyStocks.com; and Kendall Thompson, the wife of Anthony Thompson. This action centers on five pump-and-dump schemes involving the shares of Blast Applications Inc., Smart Holdings, Inc., Blue Gem Enterprise, Inc., Lyric Jeans, Inc., and Mass Hysteria Entertainment Company, Inc. In each scheme the defendants acquired a significant amount of the stock in the firm and in some instances a majority. Misleading newsletters were then sent to prospective investors. After the share price was inflated the defendants sold their shares. Subsequently, the share price dropped, leaving investors with losses. The manipulations took place between November 2009 and September 2010. The defendants had profits of at least $10 million. The complaint alleges violations of Securities Act Sections 17(a) and 17(b) and Exchange Act Section 10(b). The case is in litigation.

    Offering fraud: SEC v. Azar, Civil Action No. 14-cv-3598 (D. Md. Filed November 14, 2014). Wilfred Azar has been the majority owner of Empire Corporation, both defendants, since 1999. Joseph Giordano, also a defendant, was the branch manager and a registered representative associated with a registered broker-dealer. In addition, he is the sole owner, General Manager and President of Giordano Asset Management, a one-time registered investment adviser which served as the adviser to the Giordano fund.

    Mr. Azar became President and CEO of Empire when he acquired the company from his grandfather, its founder. The company owned and operated a 250,000 square foot, ten-story office building in Glen Burnie, Maryland. Rental income from the building was the primary source of revenue for the company. For several years prior to acquiring the company, Mr. Azar sold bonds as secondary financing for its operations. He continued this practice after acquiring Empire. Shortly after acquiring Empire Mr. Azar arranged for the broker where his long time friend and business associate, Joseph Giordano was employed, to custody the bonds so that holders could place them in an IRA account. While Mr. Giordano’s firm cautioned him to only sell the bonds on an unsolicited basis and prohibited him from recommending them, he ignored the restrictions. At the same time, Mr. Azar arranged for Broker A, associated with another registered broker-dealer, to sell the bonds. Collectively, Messrs. Azar, Giordano and Broker A raised over $7 million from about 50 investors. Investors were assured that Empire as a successful, profitable business. They were also told that their funds would be used to further develop the business. In fact the financial condition of the firm was deteriorating as it debt increased due in part to the diversion of funds by Mr. Azar to support his other unprofitable businesses and life style. By 2010 the Defendants were unable to recruit new investors. Empire was no longer able to repay existing investors. Most of the investors lost substantially all of their investment. The SEC’s complaint alleges violations of Securities Act Sections 5(a) , 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 34(b). The action is pending. A parallel criminal action was filed against Mr. Azar by the U.S. Attorney’s Office for the District of Maryland. See Lit. Rel. No. 23232 (November 14, 2014).

    FCPA

    In the Matter of Stephen Timms, Adm. Proc. File No. 3-16281 (November 17, 2014) is a proceeding which names as Respondents Stephen Timms and Yasser Ramahi, both U.S. citizens residing abroad, who were employed by FLIR Systems, Inc. The firm, founded in 1978, makes thermal imaging and other sensing products and systems, night vision and infrared camera systems. Mr. Timms was, at the time of the events at issue here, the head of FLIR’s Middle East office in Dubai. Mr. Ramahi worked in business development in the same office. He was one of the executives responsible for obtaining business in the firm’s Government Systems division for the Arabia Ministry of Interior.

    In November 2008 FLIR entered into a contract with the Arabia Ministry to sell thermal binoculars. The agreement was worth about $12.9 million. The factory acceptance test was a key condition to the fulfillment of the contract. The firm expected that a successful contract would lead to others. In May 2009 FLIR signed another agreement. This contract called for the integration of its cameras into the product of another firm, again for the Arabia Ministry. The contract was valued at $17.4 million. Messrs. Ramahi and Timmins were involved with the negotiations for both contracts.

    In February 2009 Messrs. Ramahi and Timms began preparing for the factory acceptance test, scheduled for July 2009 in Billerica, Massachusetts. The next month Mr. Timms, in the presence of Mr. Ramahi, provided five Ministry officials with watches as gifts. Each watch cost about $1,424, according Mr. Timms. The invoices were submitted to the company for payment. Subsequently, arrangements were made for the Ministry officials to go on what Mr. Timms later called a “world tour” in connection with the test – travel that extended over twenty nights in luxury hotels. The factory tour took place in Boston in one afternoon. The company paid all expenses. When the finance department flagged the expenses for the watches and later the travel it was furnished with false information and invoices. Following the inspection, the Ministry told FLIR to ship the thermal binoculars. Later the Ministry ordered additional binoculars.

    The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(5). Each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Timms agreed to pay a civil money penalty of $50,000. Mr. Ramahi will pay a penalty of $20,000.

    Opinion: The DOJ issued Opinion Procedure Release No. 14-02 (November 7, 2014). It addressed the question of successor liability. It is a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company, according to the opinion. Thus where a purchaser acquires the stock of a seller and integrates the firm into its operations, successor liability may be conferred upon the purchaser, including for FCPA violations. At the same time, liability cannot be conferred where there is none. In this case, where the firm to be acquired paid bribes but none of the acts were subject to the jurisdiction of the United States, the acquisition does not confer liability on the acquiring firm. The Department declined prosecution based on the facts presented.

    Criminal cases

    Insider trading: U.S. v. Braverman (S.D.N.Y.) is an action which names as a defendant Dmitry Braverman, formerly employed as a senior systems engineer at a prominent national law firm. Between 2010 and 2011 Mr. Braverman engaged in at least four trades based on inside information regarding potential mergers that he obtained from the law firm where he was employed. He closed out the last of those trades on the day another firm employee, Matthew Kluger, was arrested on separate insider trading charges. Subsequently, he opened a new brokerage account and placed four more trades using firm information. Overall he made about $300,000 in illicit trading profits. This week he pleaded guilty to a one count information alleging securities fraud.

    Court of Appeals

    Conflict mineral rules: National Association of Manufactures v. SEC, No. 1:13-5252 (Order dated November 18, 2014) is an action which initially challenged the conflict mineral rules written under Dodd-Frank by the Commission. The initial ruling by the Court upheld, in large part, the rules. The Court struck down, however, one provision on First Amendment grounds regarding the publication of certain information (here). The Court has now agreed to rehear that issue based on its en banc ruling in American Meat Institute v. U.S. Department of Agriculture, 760 F. 3d 18 (D.C. Cir. 2014).

    Australia

    Unlicensed FX business: The Australian Securities Investment Commission initiated proceedings against Vault Market Pty Ltd and its sole director Anamul Amin. The Commission alleged that the firm was an unlicensed FX business, conducted through a website. Over 800 investors had invested almost $1.1 million. The court found that the firm acted without a license and engaged in misleading and deceptive conduct and that Mr. Amin had contravened the law. Both defendants admitted to their conduct during the proceeding. Mr. Amin was banned from the financial services industry for eight years and from managing a corporation for five years.

    Related party loans: The ASIC initiated proceedings against LM Investment Management Ltd founder Peter Drake based on a series of loans authorized between the fund and another entity Mr. Drake owned and controlled in 2011 and 2012. The loans were supposed to be for a certain real estate development. At the time the fund entered into administration no development had taken place.

    Unregistered broker: The ASIC entered an order against Scott Logan for providing financial services between April 2011 and June 2013 without being registered. Specifically, during the period, through Shore Capital he traded in contracts for difference on behalf of retail clients when not authorized and without holding an Australian financial services license. Later he traded on behalf of retail clients when he held a license only for wholesale clients.

    UK

    Investment fund fraud: The Serious Frauds Office announced that a former director of investment firm Imperial Consolidated Group, William Godley, was ordered to pay £1.5 million which will be used to compensate victims of the fraud within six months and a three year prison term in default of payment. In 2010 Mr. Godley was convicted of conspiracy to defraud in an international scheme that raised over £250 million from about 3,000 investors who were told their funds would be used to finance a commercial loan business. Instead the money was misappropriated.

    SEC Continues to Focus On Microcap Stock Manipulation

    November 19, 2014

    Microcap stock manipulations continues to be a key area of focus for SEC Enforcement with the filing of two new cases involving the CEOs of two firms of manipulating the share price of their firms. In SEC v. Forum National Investments Ltd., Civil Action No. 5:14-cv-02376 (C.D. Cal. Filed November 18, 2014) the Commission brought an action against the company, its CEO Daniel Clozza and three others who assisted with the manipulation — Robert Dunn, William Anguka and Ahmad Ghaznawi. In SEC v. Noel, Civil Action No. 3:14-CV-5054 (N.D. Cal. Filed November 17, 2014) the Commission charged the CEO of YesDTC Holdings, Inc., Joseph Noel, with manipulating the share price of his firm.

    Forum National, based in Toronto, Ontario, initially sold memberships in a travel club and chartered its yacht. Subsequently, the company entered the life settlement business, purchasing six life insurance policies for about $1.8 million with a face value of $31 million. In 2011 the firm offered a convertible debenture secured by two of the life insurance policies that had a combined face value of $9 million. Each unit entitled the buyer to $450,000 of benefits Forum would receive when the policies matured.

    By September 2011 Forum was experiencing significant financial difficulties after selling only a few of the units. In November Mr. Clozza sought introductions to internet promotional companies. He was introduced to defendant William Anguka, who promotes stocks through internet based media, along with three of his associates. One of those associates was defendant Robert Dunn. Mr. Anguka stated that he charged $70,000 to $80,000 per month for his services. Eventually he was retained with an initial payment of $15,000. Mr. Anguka then retained Ahmad Ghaznawi, also a defendant, to assist. Mr. Ghaznawi does business under the name Skylab Global Investments.

    Subsequently, Messrs. Anguka and Ghaznawi disseminated web pages and internet news letters touting Forum’s business prospects. Despite the fact that there was no basis for the claims, the stock price, quoted in the pink sheets, climbed rapidly from about $0.35 in May 2012 to over $2.00 per share in June 2012.

    Mr. Dunn, along with relatives and associated of Mr. Clozza, sold more than one million shares of Forum stock, profiting from the inflated, artificial price. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 13(a) and Securities Act Section 17(b). The Commission also initiated an administrative proceeding against Forum under Exchange Act Section 12(j). The actions are pending. See Lit. Rel. No. 23135 (November 19, 2014).

    The SEC’s complaint against Mr. Noel also centers on a claimed stock manipulation. In February 2009 Mr. Noel formed Sonoma Winton, LLC and appointed his daughter as the sole member, although he continued to control the entity. Later that year he incorporated YesDTC, Inc. That company entered into a reverse merger with a public shell which had no meaningful assets. As a result of a stock split, about 94 million restricted shares and 44 million non-restricted shares became outstanding. Mr. Noel retained about 40 million shares. When those shares were combined with others held by Sonoma, Mr. Noel controlled about 65% of the outstanding shares. The name of the firm was changed to YesDTC Holdings, Inc.

    During 2011 Mr. Noel is alleged to have conducted two pump-and-dump schemes. In each of the schemes Mr. Noel prepared and had issued false and misleading press releases touting the business of the firm which supposedly specialized in direct-to-consumer marketing. In each instance the share price spiked upward significantly. In each instance Mr. Noel secretly sold shares through Sonoma. Overall he netted about $300,000 in profits from the two schemes.

    The complaint alleges violations of Exchange Act Sections 10(b) and 16(a), and Securities Act Sections 5(a), 5(c) and 17(a). The action is pending. See Lit. Rel. No. 23134 (November 17, 2014).

    SEC Files Another Offering Fraud Action

    November 18, 2014

    A business man, a real estate company he acquired from his grandfather, a registered representative who has now been barred by FINRA from the securities business and Maryland Division of Securities from the advisory business and an unnamed broker teamed-up to sell millions of dollars of bonds to the public. The real estate firm which issued the bonds eventually defaulted after the investor funds had been spent, leaving holders with little. SEC v. Azar, Civil Action No. 14-cv-3598 (D. Md. Filed November 14, 2014).

    Wilfred Azar has been the majority owner of Empire Corporation, both defendants, since 1999. Joseph Giordano, also a defendant, was the branch manager and a registered representative associated with a registered broker-dealer. In addition, he is the sole owner, General Manager and President of Giordano Asset Management, a one-time registered investment adviser which served as the adviser to the Giordano fund.

    Mr. Azar became President and CEO of Empire when he acquired the company from his grandfather, its founder. The company owned and operated a 250,000 square foot, ten-story office building in Glen Burnie, Maryland. Rental income from the building was the primary source of revenue for the company.

    For several years prior to acquiring the company Mr. Azar sold bonds as secondary financing for its operations. He continued this practice after acquiring Empire. The bonds were sold through oral solicitation without a prospectus or other offering documents. Investors typically received a one page certificate with the terms of the investment. Usually the certificate provided for a term of five years at 10% interest, compounded daily.

    Shortly after acquiring Empire Mr. Azar arranged for the broker where his long time friend and business associate, Joseph Giordano was employed, to custody the bonds so that holders could place them in an IRA account. While Mr. Giordano’s firm cautioned him to only sell the bonds on an unsolicited basis and prohibited him from recommending them, he ignored the restrictions. Over a three year period beginning in 2006 he raised at least $1.5 million from about 23 investors. Mr. Giordano also caused the Fund to purchase bonds. Although he had little financial data regarding Empire, over the period he became aware of its financial condition but continued to sell the bonds.

    At the same time Mr. Azar arranged for Broker A, associated with another registered broker-dealer, to sell the bonds. Broker A, relying largely on Mr. Azar’s representations regarding Empire, raised about $3.6 million from bond sales. Collectively, Messrs. Azar, Giordano and Broker A raised over $7 million from about 50 investors. Investors were assured that Empire as a successful, profitable business. They were also told that their funds would be used to further develop the business.

    As the bonds were being sold the financial condition of Empire deteriorated. Between 2006 and 2009 the financial condition of the company declined while its debt climbed. The debts came from not just from the operations of Empire but also the other unprofitable businesses of Mr. Azar. While portions of the money raised was used to repay investors, other investor funds were diverted to Mr. Azar’s life style.

    By 2010 the Defendants were unable to recruit new investors. Empire was no longer able to repay existing investors. Most of the investors lost substantially all of their investment. The SEC’s complaint alleges violations of Securities Act Sections 5(a) , 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 34(b). The action is pending. A parallel criminal action was filed against Mr. Azar by the U.S. Attorney’s Office for the District of Maryland. See Lit. Rel. No. 23232 (November 14, 2014).

    SEC Files Settled FCPA Charges Against Two Individuals

    November 17, 2014

    The SEC filed another settled FCPA action. The proceeding named two individuals as Respondents. It centers on using expensive gifts and travel as bribes. In the Matter of Stephen Timms, Adm. Proc. File No. 3-16281 (November 17, 2014).

    Respondents Stephen Timms and Yasser Ramahi, both U.S. citizens who reside abroad, were employed by FLIR Systems, Inc. The firm, founded in 1978, makes thermal imaging and other sensing products and systems, night vision and infrared camera systems. Mr. Timms was, at the time of the events at issue here, the head of FLIR’s Middle East office in Dubai. Mr. Ramahi worked in business development in the same office. He was one of the executives responsible for obtaining business in the firm’s Government Systems division for the Arabia Ministry of Interior.

    In November 2008 FLIR entered into a contract with the Arabia Ministry to sell thermal binoculars. The agreement was worth about $12.9 million. The factory acceptance test was a key condition to the fulfillment of the contract. The firm expected that a successful contract would lead to others.

    In May 2009 FLIR signed another agreement. This contract called for the integration of its cameras into the product of another firm, again for the Arabia Ministry. The contract was valued at $17.4 million. Messrs. Ramahi and Timmins were involved with the negotiations for both contracts.

    In February 2009 Messrs. Ramahi and Timms began preparing for the factory acceptance test, scheduled for July 2009 in Billerica, Massachusetts. The next month Mr. Timms, in the presence of Mr. Ramahi, provided five Ministry officials with watches as gifts. Each watch cost about $1,424, according Mr. Timms. The invoices were submitted to the company for payment.

    Subsequently, arrangements were made for the Ministry officials to go on what Mr. Timms later called a “world tour” in connection with the test. The tour began with travel from Rihadh to Casablanca, moved to Paris and then Boston. At each location the group stayed in luxury hotels for several days. While in Boston the group took a side trip to New York City. On the way back one official traveled to Beirut before returning to Riyadh. The travel extended over twenty nights. The factory tour took place in Boston in one afternoon. The company paid all expenses.

    In July 2009 FLIR’s finance department flagged the reimbursement request for the watches. Mr. Timms claimed he had made a mistake, falsely stating that the total cost should have been $1,900 rather than the total submitted. Mr. Ramahi then secured a fabricated invoice which Mr. Timms submitted to the finance department. He also told the finance department that each watch cost about $377. Mr. Timms subsequently arranged for a firm agent to cover-up the true costs when questioned by the finance department.

    Messrs. Ramahi and Timms also claimed that cost for the “world tour” was a mistake. The finance department was told that the Ministry had used the firm travel agent to book their own travel which was mistakenly billed to FLIR. Mr. Timms submitted a false invoice to the finance department.

    Following the inspection, the Ministry told FLIR to ship the thermal binoculars. Later the Ministry ordered additional binoculars.

    Throughout this process, FLIR had a code of conduct which prohibited firm employees from violating the FCPA. The policy required that all information be accurately recorded. Messrs. Ramahi and Timms had received FCPA training prior to the events involved here.

    The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(5). Each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Timms agreed to pay a civil money penalty of $50,000. Mr. Ramahi will pay a penalty of $20,000.

    Former SEC Chairman Roderick Hills And The FCPA

    November 16, 2014

    Roderick Hills, who passed away at the end of last month, served as Chairman of the SEC through one if its most turbulent periods – the birth of the Foreign Corrupt Practices Act. When Mr. Hills became Chairman in 1975 the SEC had already initiated the first of what would become a series of illicit payment cases, having settled with American Ship Building and its then CEO.

    In his first year of service, and throughout his term, the agency resolved a series of foreign payments cases with some of the largest corporations in the U.S. and their senior executives. Those settlements included Phillips Petroleum (1975), Northrop (1975), Gulf Oil (1975), Lockheed Aircraft (1976) and General Tire (1976). Each of the settlements reflected the fundamental values of the securities laws – accountability to the shareholders whose money was being used to make the illicit payments. Thus each settlement focused on improving corporate governance, accountability and transparency.

    While the Commission’s foreign payments actions were successful many were highly critical of the investigations and cases. Some thought the cases should not have been brought. Others claimed that the sums involved were not material. Still others argued that since many of the transactions took place in foreign countries the issue was one of local law in the particular country. Even within the government there was debate with the State Department expressing concern regarding the implications of corporate payments on foreign policy while the Department of Defense, which assisted manufactures selling weapons systems, was actually involved in some of the conduct. Chairman Hills recounted some of the criticisms faced by the SEC in a speech delivered at Yale Law School in 1976:

    · One commentator stated that the questionable payments cases were just another experiment doomed to fail, comparing the cases to prohibition: “’America’s unlamented noble experiment with prohibition in the 1920’s made more sense than this new crackdown. Back then, the do-good arguments for banning booze worked out as a bonanza for crime, corruption, and conspiracy. Now the SEC’s new experiment in righteousness is about to backfire too. It will register more laughter abroad than sales. Washington’s cleanup code for corporations under pressure to pay off abroad is reducing America to a role of ‘a pitiful, helpless giant’ . . .’”

    · Another comment from a distinguished Washington lawyer and former SEC staff member noted: “‘What function remains for the SEC here? I submit; none. The Commission is plainly out of its ballpark . . . ‘”

    · A state court judge wrote: “‘I read your bureaucratic blurb in the Wall Street Journal today (about foreign payment cases). You are out of your mind. Stockholders don’t give a good damn.’”

    During the on-going Congressional hearings a series of proposals were debated that could impact the future of the agency. Those included one to give the SEC criminal authority and others focused on adding criminal bribery provisions but not the books and records and internal control provisions favored by the SEC.

    Throughout the pubic criticism and Congressional debates the SEC continued with its investigations. The culminated was the Volunteer Program during which 450 companies self-reported, conducted extensive internal investigations, disclosed wrongful conduct and settled actions with the Commission, agreeing to significant remedies. The program did not offer issuers or those involved immunity from prosecution, or even promise “cooperation credit.” It did not require the company to consult with the SEC staff. Rather, it was an effort to spur corporate self-governance since the illicit or questionable payment cases graphically illuminated serious corporate self-governance issues. As Chairman Hills stated:

    “It is apparent that our system of corporate self-regulation policed by independent auditors, directors and counsel and ultimately enforced by the SEC has broken down. Hundreds of millions of dollars have been siphoned out of corporate cash flow and spent out of slush funds with the knowledge of some members of top corporate management but without the knowledge of the outside directors, outside auditors and stockholders. No matter that it is only a score or so out of thousands, some are among the biggest and the most audited corporations in the world. If they can do it, who can’t?’ ”

    The Volunteer Program, as well as the other foreign payments cases brought by the agency during the period, was a step toward repairing and strengthening corporate self-governance under the supervision not of the government but of the board of directors and its independent directors and outside auditors and counsel. It was that focus which sparked the initial inquiries. It was that continued focus through the tenure of Chairman Hills that made the cases a success and ultimately helped craft the FCPA by the end of his term in 1977.

    This Week In Securities Litigation (Week ending November 14, 2014)

    November 13, 2014

    Supreme Court Justices Scalia and Thomas indicated that the High Court may at some point consider a question regarding the application of insider trading law in criminal cases and the deference due, if any, to the interpretations of that body of law by the SEC. The statement was appended to the denial of certiorari in an insider trading case where the Second Circuit deferred to the SEC’s views.

    The CFTC and the UK’s Financial Conduct Authority announced significant settlements with major banks regarding the manipulation of the forex markets. A noteworthy point was the comments of the CFTC that it lacked the resources to move forward further with the inquiry, echoing comments made when the agency settled the London Whale action.

    SEC enforcement continued to emphasize the use of administrative proceedings. The agency filed its sixth insider trading action in that forum since September. In addition, the Commission brought actions centered on Rule 105, a misappropriation action, a SOX claw-back case, an investment fund fraud action and an action based on the sale of unregistered securities .

    Supreme Court

    Insider trading; The Court declined to review the insider trading conviction in Whitman v. U.S., No. 14-28 (S.Ct. Order entered Nov. 10, 2014). Justice Scalia attached a statement to the order, joined by Justice Thomas. The issue addressed by the two Justices is: “ Does a court owe deference to an executive agency’s interpretation of a law that contemplates both criminal and administrative enforcement?” Here the Second Circuit gave deference to the SEC’s view on insider trading. The deference issue was not raised by Mr. Whitman. Justice Scalia concurred in not accepting the case because of the record. He concluded his statement by noting that “when a petition properly presenting the question comes before us, I will be receptive to granting it.”

    CFTC

    Remarks: Chairman Timothy Massad addressed the Swaps Execution Facilities Conference (November 12, 2014). His remarks reviewed the new regulatory framework, noted that the new regulations will take time to properly implement and that the agency is working to phase them in. The Chairman also stated that in some areas they are hindered because the agency does not have sufficient financial resources (here).

    SEC Enforcement – Filed and Settled Actions

    Statistics: This week the SEC filed 1 civil injunctive action and 5 administrative proceedings, excluding 12j and tag-along-actions.

    Rule 105: In the Matter of Pennington Capital Management LLC, Adm. Proc. File No. 3-16271 (November 12, 2014) is a proceeding which names as Respondents the unregistered investment adviser and its owner, Robert J. Evans. In April and May 2012 the Respondents purchased equity securities in two offerings from an underwriter or broker dealer participating in follow-on offerings after having sold the same securities short, reaping profits of $95,204.55. The Order alleges violations of Rule 105. To resolve the proceeding the respondents each consented to the entry of a cease and desist order based on the Rule. In addition, they agreed to disgorge their trading profits, pay prejudgment interest and a penalty of $65,000.

    Insider trading: In the Matter of Michael S. Geist, Adm. Proc. File No. 3-16269 (November 12, 2014). Michael Geist is employed at ViaSat, Inc. as a Government Sales Manager. Brent Taylor, also named as a Respondent, is the former COO and Executive V.P of a subsidiary of Comtech. He left the firm in 2004 and is now employed at his firm, Rationa-3, LLC, which works on various government satellite communications contracts. This action centers on the award of a U.S. Army contract, Blue Force Traking-2, to ViaSat in 2010. The original Blue Force Tracking production contact was awarded to Comtech in the early 2000s. Mr. Taylor was employed at the firm during that time and was thus familiar with the contract. In December 2009 a request for proposal was officially solicited by the U.S. Army to produce the Blue Force Tracking-2. Mr. Grist had worked on gathering material for an information request regarding the solicitation. He had recruited Mr. Taylor to assist. Only ViaSat and Comtech submitted bids. Two days prior to the announcement of the award on July 21, 2010, the Army contracting officer for the program sent an e-mail to ViaSat informing the firm that it had been selected for the award. Mr. Geist learned about the e-mail, called Mr. Taylor and purchased put option contracts on Comtech stock and calls on ViaSat shares. The next day, July 20, Mr. Taylor returned the call of Mr. Geist. That evening Mr. Geist placed an order to sell the Comtech Telecom and ViaSat options he had purchased. On the morning of July 21 the Army’s Deputy General Manager on the program advised an engineer at a defense contractor for whom Mr. Taylor served as a subcontractor that ViaSat had won the contract. Mr. Taylor was informed. Later that day he sold shares of Comtech in his account. His wife did the same. He also sold shares in a second account. Later that morning Comtech Telecom announced that it had not obtained the award. Within fifteen minutes of the release, the stock dropped almost 28%. ViaSat’s shares rose modestly. The Taylor sell orders were executed just before the Comtech announcement, except for a portion of Mr. Taylor’s order at the second broker which was only partially executed prior to the press release. The sell orders placed the evening before by Mr. Geist were executed one minute after the press release. The Order alleges violations of Exchange Act Section 10(b). Both Respondents settled with the Commission, consenting to the entry of cease and desist orders based on the Section cited in the Order. In addition, Mr. Geist agreed to pay disgorgement of $27,303.85, prejudgment interest and a penalty in an amount equal to the disgorgement. Mr. Taylor agreed to pay disgorgement of $46,828.86, prejudgment and, within 120 days of the entry of the Order, disgorgement in the same amount along with post judgment interest. Mr. Taylor will also pay a penalty of $46,828.86. Each Respondent is prohibited from serving as an officer or director for a period of five years.

    Clawback: In the Matter of Dr. L.S. Smith, Adm. Proc. File No. 3-16270 (November 12, 2014) is a proceeding against Dr. Smith, the former COB and CEO of DGSE Companies Inc. During his tenure there were fraudulent accounting entries at the firm. A restatement was required. The action does not allege that Dr. Smith was involved only that he is required to repay certain incentive compensation and stock sale profits under Section 304(a) of Sarbanes-Oxley. The proceeding was resolved with the entry of a cease and desist order based on the SOX Section. Respondent is required to reimburse the company a total of $106,250 and 59,738 shares of the firm’s stock.

    Investment fund fraud: In the Matter of Pakajkumar Srivastava, Adm. Proc. File No. 3-16267 (November 12, 2014) is a proceeding which names as Respondents Mr. Srivastava, a resident of Mumbai and an internet marketer, and Nataraj Kavuri, a resident of Hyderabad, India, employed at a software company. Beginning in April 2013 Respondents operated a website called “profits paradise.” Through that website they solicited investments in a pooled fund that supposedly invested in stocks, forex and commodities. Three investment programs were offered. All guaranteed what were called huge profits. The risks were promised to be minimal. The offering was structured in such a manner that under certain conditions investors could never recover their principal investments. The offering has all the hallmark of a type of highly suspicious offering called a high-yield investment program, according to the Order. In addition to the website, investors were solicited through Facebook, You Tube and other social media. The Respondents disguised their identities, according to the Order which alleges violations of Securities Act Sections 17(a)(1) and (3). The matter will be set for hearing.

    Unregistered securities: In the Matter of Eureeca Capital SPC, Adm. Proc. File No. 3-146265 (November 10, 2014). Eureeca Capital, a Cayman Islands company, operates an online, securities-based crowd-funding platform. Through the platform issuers are connected with investors to raise funds in exchange for equity. The securities offered are from non-U.S. based issuers. The site also specifies that the securities are not being offered to U.S. persons. However, the firm did not have any compliance procedures designed to prevent U.S. persons from registering. As of May 2014 about 50 U.S. persons were registered on the site, according to the Order. In 2013 Eureeca accepted funds from three U.S. persons for offerings. Each investor provided verification of citizenship and residence. While Eureeca did not take steps to verify that the investors were accredited, two of the U.S. investors certified to that fact in e-mail prior to the offerings. The three U.S. persons invested about $20,000 in four separate offerings through the website. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a). To resolve the proceeding, Eureeca consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the firm agreed to pay a civil penalty of $25,000. In resolving the proceeding, the Commission considered the prompt voluntary cooperation of the company and its remedial actions.

    Misappropriation: SEC v. Johnson, Civil Action No. 1:14-cv-08825 (N.D. Ill. Filed Nov. 5, 2014) is an action against Eric Johnson, an investment adviser affiliated with a broker-dealer. Since 2004 Mr. Johnson has misappropriated over $1million in client funds by forging their signatures on wire transfers. He admitted this to the staff. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The court granted a request for injunctive relief, an asset freeze and other emergency relief. The action is pending and the investigation is continuing. See Lit. Rel. No. 23130 (Nov. 12, 2014).

    CFTC

    Manipulation: The agency fined five banks over $1.4 billion for attempted manipulation of the forex markets. Specifically, the following firms were sanctioned: Citibank and JPMorgan, $310 million each; RBS and UBS $290 million each; and HSBC $275 million. Cease and desist orders were entered and each bank is required to implement certain remedial steps regarding internal controls and procedures and the supervision of traders.

    Criminal cases

    Investment fund fraud: U.S. v. Shavers (S.D.N.Y.) is a case in which Trendon Shavers was arrested and charged with operating a Ponzi scheme. Specifically, beginning in September 2011 he raised about $4.5 million or 764,000 Bitcoin through Bitcoin Savings and Trust on the promise that investors would receive interest of 7% per week. Profits were supposed to come from an arbitrage strategy and Mr. Shavers personally guaranteed any losses. In fact the operation was a Ponzi scheme.

    Australia

    Investment fund fraud: The Australian Securities and Investment Commission charged Mrs. & Mrs. Douglas Johnson with 70 offenses, including fraud and attempting to pervert the course of justice, in connection with the operation of a Ponzi scheme. Specifically, in connection with Nominees (USA) Pty Ltd and Small Business Management Pty Ltd the couple raised about $1.5 million from investors that was to be used for property developments in the U.S. Rather than invest the funds as promised, the couple used the money for their own purposes.

    Hong Kong

    Exchange connect: The Securities and Futures Commission and the China Securities Regulatory Commission approved the launch of the Shanghai-Hong Kong connect pilot scheme. Trading will commence through the connect on November 17, 2014. This will establish mutual stock market access between Hong Kong and the Mainland. The two regulators also entered into an MOU, strengthening cross-boarder regulatory and enforcement cooperation.

    UK

    Manipulation: The Financial Conduct Authority imposed £1.1 billion in fines on five banks and is implementing an industry-wide remediation program tied to the manipulation of the forex market. Specifically, the following fines were imposed: Citibank £225,575,000; HSBC £216,363,000; JPMorgan £222,166,000; RBS £217,000,000; and UBS £233,814,000. These firms were found to be the worst offenders. The remediation program will address the root causes of the difficulty.

    SEC Brings Its Sixth Insider Trading Action As An Administrative Proceeding Since September

    November 12, 2014

    The SEC is clearly bringing more cases as administrative proceedings. To be sure, many of its “broken windows” actions are brought in that forum. At the same time, it is brining other cases which are traditionally brought as civil injunctive actions as administrative proceedings. While the agency traditionally brings insider trading cases in Federal Court, since September 2014, the SEC has filed five insider trading cases as administrative proceedings (here). Now the number is six with the filing of In the Matter of Michael S. Geist, Adm. Proc. File No. 3-16269 (November 12, 2014).

    Michael Geist is employed at ViaSat, Inc. as a Government Sales Manager. Previously he worked for Comtech Telcommunications, Inc. Brent Taylor, also named as a Respondent, is the former COO and Executive V.P of a subsidiary of Comtech Telecom. He left the firm in 2004 and is now employed at his firm, Rationa-3, LLC, which works on various government satellite communications contracts. He wife at the time relevant to this proceeding was employed as the bookkeeper at Rationa-3.

    This action centers on the award of a U.S. Army contract, Blue Force Traking-2, to ViaSat in 2010. The original Blue Force Tracking production contact was awarded to Comtech in the early 2000s. Mr. Taylor was employed at the firm during that time and was thus familiar with the contract.

    In April 2009 the program manger for the Blue Force Tracking program posted a request for information, indicating that it would solicit bids for the next generation of Blue Force Tracking through a request for proposal in the near future. Mr. Grist worked on assembling information for the bid. During that period he met with Mr. Taylor and sought to learn specifics about the original contract. He also sought to establish a working relationship with Mr. Taylor which included brining him on as a consultant for the firm’s SATCOM business and contract solicitation.

    In December 2009 a request for proposal was officially solicited by the U.S. Army to produce the Blue Force Tracking-2. Only ViaSat and Comtech submitted bids. Most market analysts believed that Comtech would receive the award.

    Two days prior to the announcement of the award on July 21, 2010, the Army contracting officer for the program sent an e-mail to ViaSat informing the firm that it had been selected for the award. The communication noted that the award was subject to Congressional approval and that it had not been publically announced. That evening Mr. Grist called Mr. Taylor. On the evening of July 19, 2010 Mr. Geist also logged into his online brokerage account and purchased put option contracts on Comtech stock and calls on ViaSat shares.

    The next day, July 20, Mr. Taylor returned the call of Mr. Geist. The two men had a series of short calls. Mr. Taylor called his broker at one point and asked if there was any news about Comtech. There was none. That evening Mr. Geist placed an order to sell the Comtech Telecom and ViaSat options he had purchased.

    On the morning of July 21 the Army’s Deputy General Manager on the program advised an engineer at a defense contractor for who Mr. Taylor served as a subcontractor that ViaSat had won the contract. The Director of Business Development telephoned Mr. Taylor and told him the news. Mr. Taylor called his broker. When the broker again told him that there was no news about the contract, Mr. Taylor sold 4,000 shares of Comtech Telecom, stating he hear about the award from a friend. He also asked the broker to sell shares of the firm held in his then wife’s account. The broker refused. Subsequently, the wife called and sold the shares. Mr. Taylor also called another broker and sold additional Comtech Telecom shares from another account.

    Later that morning Comtech Telecom announced that it had not obtained the award. Within fifteen minutes of the release, the stock dropped almost 28%. ViaSat’s shares rose modestly. The Taylor sell orders were executed just before the Comtech announcement, except for a portion of Mr. Taylor’s order at the second broker which was executed prior to the press release. The sell orders placed the evening before by Mr. Geist were executed one minute after the press release.

    Mr. Taylor knew, or had reason to know, that Mr. Geist breached his fiduciary duty to his employer by tipping him. Alternatively, he misappropriated information from the defense contractor for whom he worked as a subcontractor, according to the Order. That Order alleges violations of Exchange Act Section 10(b).

    Both Respondents settled with the Commission, consenting to the entry of cease and desist orders based on the Section cited in the Order. In addition, Mr. Geist agreed to pay disgorgement of $27,303.85, prejudgment interest and a penalty in an amount equal to the disgorgement. Mr. Taylor agreed to pay disgorgement of $46,828.86, prejudgment and, within 120 days of the entry of the Order, disgorgement in the same amount along with post judgment interest. Mr. Taylor will also pay a penalty of $46,828.86. Each Respondent is prohibited from serving as an officer or director for a period of five years.