THIS WEEK IN SECURITIES LITIGATION (April 22, 2011)
As the Galleon insider trading trial draws to a close and the Lindsey FCPA trial moved forward in the Central District of California, one of the few senior executives charged in a market crisis case was found guilty by a jury after a ten day trial. SEC enforcement brought actions based on an undisclosed related party transaction, obtained the appointment of a receiver in an investment fund fraud action and settled with the remaining defendants in an insider trading case which began as an action against unknown investors. Finally, FINRA indefinitely suspended a firm and its president.
SEC Enforcement
Related party transactions: SEC v. Phillips, Civil Action No. 1:11 CV 422 (E.D. Va. April 20, 2011) is a settled action against Terry Phillips, the chairman of the board of SouthPeak Interactive Corporation which develops and publishes video games for a number of video game platforms including the PlayStation, xBox and Wii devices. According to the complaint in February 2009 the company ordered additional units from a video game manufacturer but lacked sufficient funds to pay for the purchase. Mr. Phillips advanced $304,440 of his personal funds to pay for the units. In doing so he failed to bring it to the attention of the audit committee. The transaction was not disclosed as a related party transaction in the 10Q for the quarter ended March 31, 2009. Mr. Phillips also signed an management letter representing to the outside auditors that all related party transactions had been disclosed when they had not.
To settle the case Mr. Philips consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Rule 13b2-2 which prohibits officers and directors from making false statements to the auditors and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). He also agreed to pay a civil penalty of $50,000 and to the entry of an order requiring him to comply with a cease and desist order entered May 2007 which requires him not to violate certain provisions of the securities laws.
In a related administrative proceeding the company consented to the entry of a cease and desist based on Exchange Act Section 13(a). Respondent Patrice Strachan also settled. She is the former v.p of operations who knew of the transaction, was responsible for the proper recording of transactions and instructed her subordinate not to tell the CFO about it. Ms. Strachan consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). She also agreed to pay a civil penalty of $10,000. In the Matter of Southpeak Interactive Corporation, Adm. Proc. File No 3-14350 (April 21, 2011).
Unregistered securities: SEC v. Martin, Civil Action No. 09-cv-05259 (N.D. Ill.) is an action against Duane Martin and Gary Trump. The complaint asserts fraud claims against Mr. Martin, the former CEO of now defunct Universal Food & Beverage, Inc. He previously settled with the SEC after pleading guilty on criminal charges and being sentenced to prison. As to Mr. Trump the complaint alleged he violated the registration provisions by improperly issuing S-8 stock to stock promoters and Mr. Martin’s personal creditors. Mr. Trump resolved the claims against him by consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 5 and agreeing to pay disgorgement of $69,976.27 along with prejudgment interest. A penalty was waived based on financial condition.
Investment fund fraud: SEC v. Commodities Online, LLC, Civil Action No. 11-cv-60702 (S.D. Fla. Filed April 21, 2011) is an action against the named company and Commodities Online Management, LLC. Beginning in January 2010 Commodities Online sold participation units and membership units in commodities contracts. Commodities Online claimed to have at least $24 million from investors in units and another $2.4 million in memberships. Defendants told investors that the investments were safe because they only purchased contracts after arranging for a buyer and seller. Profits were made from the spread. Investors were suppose to earn 5% per month without speculation. In fact much of the money was diverted to companies controlled by the principals of the defendants and there were no profits. The complaint alleged violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The defendants consented to the appointment of a receiver and to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint and to pay disgorgement, prejudgment interest and a civil penalty as determined by the court.
Insider trading: SEC v. Di Nardo, Case No. 08 CV 6609 (S.D.N.Y. Filed July 25, 2008) is an action initially filed against unnamed traders. The amended complaint named as defendants: Gianiuca Di Nardo; his investment vehicle Corralero Holdings, Inc.; Oscar Ronzoni, an Italian citizen who worked for a company that provides business consulting services; Paolo Busardo, also an Italian citizen who is a professor of economics at a university; Tatus Corporation, an investment vehicle affiliated with Messrs. Ronzoni and Busardo; and A-Round Investment SA, a consulting firm controlled by Mr. Busardo.
The amended complaint clamed that defendants Di Nardo and Carralero Holdings traded in American Power options through an omnibus account at UBS AG, Zurich, Switzerland shortly prior to a takeover announcement in October 2006. It also alleged that each of the defendants traded through the same omnibus account in DRS Technologies shortly before an announcement in October 2006 that the company was in discussions to be acquired. The first set of trades resulted in a profit of $1.7 million while the second netted the traders about $1.6 million.
Mr. Di Nardo and Corralero Holdings settled at the time the amended complaint was filed. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The order also made them jointly and severally liable for the payment of $2,110,6000 in disgorgement along with prejudgment interest and a civil penalty of $700,000. This week the Commission concluded the litigation settling with the remaining defendants. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The order specifies that they are jointly and severally liable for the payment of $967,699.97 in disgorgement along with prejudgment interest and a civil penalty of $483,849.99.
Investment fund fraud: SEC v. Art Intellect, Inc., Case No. 2:11-CV-00357 (D. Utah Filed April 18, 2011) is an action against the company and its principals, Patrick Brody and Laura Roser. The defendants obtained over $2.5 million from about 75 investors who were told that the funds would be invested in distressed real estate which would be rehabilitated and resold. Investors were promised returns of 10 to 30% per month. In fact the funds were used to support the life style of the individual defendant. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The Commission obtained a TRO, asset freeze and the appointment of a receiver.
Criminal cases
Investment fund fraud: U.S. v. Mazella (E.D.N.Y. Unsealed April 21, 2011) The indictment here charges Joseph Mazella with securities fraud, wire fraud and money laundering. Mr. Mazella solicited investments in Third Millennium enterprises, Inc. and 150 West State Street Corp from 2007 through 2010. Investors were told their funds would be put in various real estate projects. Over a three year period the defendant raised about $12 million. Mr. Mazella stopped investing in real estate shortly after he began operations and ran the operation as a Ponzi scheme. The case is in litigation.
Looting: U.S. v. Farkas (E.D. Va.). Lee Farkas, former Chairman of mortgage lender Taylor, Bean & Whitaker was found guilty by a jury following a ten day trial. Specifically, the jury found Mr. Farkas guilty on one count of conspiracy to commit bank, wire and securities fraud, six counts of bank fraud, four counts of wire fraud, and three counts of securities fraud. Sentencing is scheduled for July 1, 2011. The charges centered on the billion dollar fraud which lead to the collapse of Taylor Bean and its lender, Colonial Bank. Mr. Farkas and his coconspirators were alleged to have essentially kited checks in multiple Colonial accounts to cover the increasing cash deficits at the company, sold $1.5 billion in largely worthless securities to the bank, defrauded holders of commercial paper issued by a credit facility and trying to defraud the TARP program.
FINRA
Pinnacle Partners and its president, Brian Alfaro, were suspended indefinitely by FINRA for violating a temporary cease and desist order entered against the firm and its president in a proceeding. In that action it was alleged that Pinnacle and Mr. Alfaro were operating a boiler room in which thousands of cold calls were made each week to sell oil and gas interest using fraudulent misrepresentation.