Microcap fraud, misappropriation by investment advisers and offering fraud cases were the focus of SEC enforcement this week. The Commission filed a microcap fraud action centered on blank check companies involving ten individuals. Two new actions focused on misappropriation by investment advisers while an additional two centered on offering fraud claims. An action was also brought based on a financial fraud that endured for over two decades.
Testimony: Chair Mary Jo White testified before the House Subcommittee on Financial Services and General Government Committee on Appropriations (April 15, 2015). Her testimony centered on the Fiscal Year 2016 budget request (here).
Remarks: Commissioner Daniel M. Gallagher delivered remarks at the Harvard Law School Symposium on Building the Financial System of the 21st Century titled “An Agenda for Europe and the United States, Frankfurt, Germany (April 15, 2015). His remarks focused on regulatory harmonization (here).
Remarks: Commissioner Kara M. Stein delivered remarks at the SIFMA Operations Conference titled “The Dominance of Data and the Need for New Tools” (April 14, 2015). Her remarks focused on new market structure, the significance of data and an office of data strategy (here).
Remarks: Commissioner Luis A. Aguilar delivered remarks at the North American Securities Administrators Association Annual NASAA/SEC 19(d) Conference titled “Regulators Working Together to Serve Investors,” Washington, D.C. (April 14, 2015). His remarks focused on the risks of complex securities to retail investors and enhancing the regulatory partnership between the SEC and state regulators (here).
Testimony: Commissioner Mark Wetjen testified before the House Committee on Agriculture, Subcommittee on Commodity Exchanges, Energy and Credit (April 14, 2015). His testimony reviewed rule making under Dodd-Frank, disruptive technologies, cybersecurity and automated trading (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 6 civil injunctive actions and 6 administrative proceeding, excluding 12j and tag-along proceedings.
Microcap fraud: SEC v. McKelvey, Case No. 9:15-cv-80496 (S.D. Fla. Filed April 16, 2015) is an action which has two groups of defendants: The control group included Danile McKelvey, Alvin Mirman and Steven Sanders. The nominee group included Scott Hughes, Jeffrey Lamson and Edward Sanders. The control group implemented a scheme which involved at least 22 blank check companies that were set up for reverse mergers. The control persons retained a group of attorneys, auditors, brokers and transfer agents to implement the scheme which included keeping the periodic filings of the firms current and filing applications with FINRA and Depository Trust Company. The filings and certificates were falsified. The defendants in the second group served as nominal figureheads of the companies. About 18 of the blank check companies were sold through reverse mergers, netting about $6 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(a), 13(b)(2)(B), 13(b)(5), 15d-15, 20(b) and control person liability under Exchange Act Section 20(a). Four settled administrative proceedings, each against a person who served as a nominee, were filed: In the Matter of Edward T. Farmer, Adm. Proc. File No. 3-16493 (April 16, 2015)(settled with a consent to a cease and desist order based on Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 15(d), the payment of $35,000 in disgorgement, prejudgment interest; payment of the prejudgment interest was waived based on financial condition; officer/director and penny stock bars were entered); In the Matter of William J. Gaffney, Adm. Proc. File No. 3-16494 (April `6, 2015)(consent to a cease and desist order based on the same Sections as in Farmer along with an officer/director and penny stock bar; disgorgement of $10,000 and prejudgment interest, payment of which is waived based on financial condition); In the Matter of Kevin D. Miller, Adm. Proc. File No. 3-16496 (April 16, 2015)(consent to a cease and desist order based on the same Sections as Farmer, an officer/director and penny stock bar and $10,000 in disgorgement along with prejudgment interest, payment of which is waived except for $5,000 based on financial condition); In the Matter of Ronald A. Warren, Adm. Proc. File No. 3-16495 (April 16, 2015)(consent to a cease and desist order based on the same Sections as Farmer, an officer/director and penny stock bar and the payment of disgorgement of $12,029.88 and prejudgment interest; no penalty was assessed based on financial condition). See Lit. Rel. No. 23243 (April 16, 2015).
Misappropriation: In the Matter of Sean C. Cooper, Adm. Proc. File No. 3-16130 (April 16, 2015). Mr. Cooper was the managing member of WestEnd Capital Management, LLC, a San Francisco based registered investment adviser. He was also the portfolio manager for WestEnd Partners L.P, a hedge fund advised by WestEnd. Although the operating documents called for the payment of an annual management fee in quarterly segments, beginning in March 2010 Mr. Cooper withdrew money from the Fund as if it were his personal line of credit and in a manner which had no relationship to the fees owed. Overall he misappropriated about $211,579. The Order alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. To resolve the proceeding Mr. Cooper consented to the entry of a cease and desist order based on the Sections cited. He also agreed to the entry of a bar from the securities business. In addition, he will pay disgorgement in the amount of the cash he took from the fund and prejudgment interest along with a civil penalty of $175,000.
Subprime disclosure: SEC v. Syron, Civil Action No. 11-cv-9201 (S.D.N.Y.) is a previously filed action whose defendants included the former CEO of Freddie Mack, Richard Syron, its former Business Officer, Patricia Cook, and a former senior executive, Donald Bisenius. The Court entered an order resolving the case as to these defendants. That order requires that the three defendants refrain from signing certain periodic reports required to be filed with the SEC or SOX certifications and from violating the antifraud and reporting provisions of the federal securities laws for 18 months as to Mr. Syron and Ms. Cook and 12 months as to Mr. Bisenius. Each defendant will contribute the following amounts to a fair fund: Mr. Syron $250,000; Ms. Cook, $50,000; and $10,000 for Mr. Bisenius. See Lit. Rel. No. 23241 (April 14 2015).
Investment fund fraud: SEC v. Evans, Civil Action No. 1:15-01118 (N.D. Ga. Filed April 13, 2015). Beginning in 2012 defendant James Evans, operating a website using the DollarMonster name through domain name Cashflowbot.com, soliciting investors with claims of big profits. The DollarMonster site stated that the payout of profits was tied to receipt of additional investment funds from others. Specifically, investors were told that their funds would be pooled and that the pool pays off the next person in line giving them a return of 200% after which that investor returns to the end of the line. Each time funds come in there is a payoff. If no funds come in the line does not change. For this service DollarMonster charged a fee of 2.5% plus a $2.24 transaction fee. The website specifically represented that DollarMonster had paid out sums exceeding those contributed by investors, which is false. It also did not tell investors that if there were no additional contributions the scheme would collapse. In 2013 the site was altered several times, making a series of false claims. When the staff issued a subpoena to the site it ceased operation, although the complaint alleges, on information and belief, that Mr. Evans continues to solicit investor funds. The complaint alleges violations of Securities Act Sections 5(a) and 5(c), each subsection of Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4). The case is pending.
Offering fraud: SEC v. Brown, Civil Action No. 6:15-cv-119 (W.D. Tx. Filed April 13, 2015). DefendantLeroy Brown was a member of the United States Army for twelve years. After separating from the service he formed LB Stocks and Trades Advice LLC 2014. Mr. Brown and his firm claim on its website to furnish a variety of securities and investment related services and to be a FINRA broker dealer, none of which is correct.
Mr. Brown, who resides near Fort Hood military instillation, began targeting military personnel to purchase $1,000 membership certificates in the company. Touting his military service, he claimed that investors would participate in LB Stocks’ speculative investments in raw, undeveloped land. Potential investors were told to wire their investment funds to Mr. Brown. Beginning in early 2014 Mr. Brown began receiving substantial deposits into his personal brokerage account. He then transferred nearly all of those funds from his brokerage account to his personal bank account. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Commission obtained a temporary freeze order at the time the complaint was filed. The case is pending.
Offering fraud: SEC v. Mieka Energy Corporation, Civil Action No. 3:15-cv-01097 (N.D. Tx. Filed April 10, 2015). Named as defendants in the action are: Mieka Energy, a wholly owned subsidiary of another defendant, Vadda Energy Corporation, based in Flower Mound, Texas, which registered its shares under the Exchange Act; Daro Blankenship, the founder and managing director of Mieka and also the President and CEO of Vadda of which he and his wife own 79%; Robert Myers, Jr., Mieka’s vice president of project development; and Stephen Romo, previously a real estate broker, who sold interests in Mieka. Beginning in September 2010 Mieka Energy marketed what were called joint venture interests nationwide to investors, raising about $4.4 million from 60 investors. The interests were marketed through extensive boiler-room type calls. Two of the salesmen in this effort were defendants Myers and Romo. Neither was registered with the SEC or associated with a Commission registered broker-dealer. Contrary to the representations made to investors, Mieka Energy did not drill the horizontal well. It did do work on a vertical well which was not completed. When most of the investor funds were gone, Mr. Blankenship furnished investors with a series of update letters, falsely claiming that the wells would be developed and completed in the near future. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 15(a) and control person liability under Section 20(a). The case is pending. See Lit. Rel. No. 23239 (April 10, 2015).
Misappropriation: SEC v. Cohen, Civil Action No. 2:15-cv-01292 (D. N.J.) is a previously filed action which named as defendants Mr. Cohen and Proteonomix, Inc., a company for which Mr. Cohen served as CEO and at times CFO. The complaint alleged that beginning in 2012 Mr. Cohen implemented a scheme by which he fraudulently obtained over $600,000 from the firm by having it issue shares to accounts he controlled. Those shares were subsequently sold at his direction. The Court entered an order containing a permanent injunction based Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(a), 13(b)(2)(b) and 13(b)(5). The order also provides that disgorgement, prejudgment interest and a civil penalty will be determined at a later date by the Court. Previously, Mr. Cohen pleaded guilty in a parallel criminal case. See Lit. Rel. No. 23238 (April 10, 2015).
Financial fraud: SEC v. Fusamae, Civil Action No. 15 C 3142 (N.D. Ill Filed April 9, 2015) is an action against Katsuichi Fusamae, senior accounting officer of Molex Japan, based in Yamato, Japan. It is a subsidiary of Molex Inc. whose shares were traded on NASDAQ. Mr. Fusamae was required as part of his duties to invest excess cash in conservative instruments such as CDs. Beginning in 1989 Mr. Fusamae invested the firm’s excess cash in riskier securities. He also traded equities through a margin account. Almost immediately Mr. Fusamae suffered losses. Initially he was able to conceal the losses by borrowing from the broker and moving the funds into the accounts temporarily at year end so he could show the auditors account statement with appropriate balances. Later he used the firm’s banking relations and pledged its real estate to secure loans to cover the losses. Since he reconciled the accounts, the firm was unaware of his activities. The fraud was also concealed from the auditors through the use of forged confirmations. In late March 2010 Mr. Fusamae was unable to secure additional funding to cover the losses. The next month he mailed a letter of confession to the company, revealing losses that he estimated to be about JPY 16.6 billion or U.S. $166 million. The losses had a material impact on the financial statements of the parent company. In August 2010 Molex filed a Form 8-K disclosing that it was restating its financial statements for fiscal 2008, 2009 and the first three quarters of fiscal 2010 to account for the losses from the trading scheme. The complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 23237 (April 9, 2015). See also In the Matter of Molex, Inc., Adm. Proc. File No. 3-1642 (April 9, 2015)(settled action against the firm).
Misappropriation: U.S. v. Oppenheim (S.D.N.Y. April 16, 2015) is an action which charges Michael Oppenheim with wire, securities and investment adviser fraud. Mr. Oppenheim was formerly an investment adviser at an international bank. He is alleged to have embezzled about $20 million from clients over a four year period. Beginning in March 2011 he converted client funds to his own use. In some instances he convinced clients to withdraw the funds which he falsely stated would be used to purchase low risk municipal securities. The money was then converted to his personal use. To conceal the scheme clients were furnished with false account statements. The SEC filed a parallel action. SEC v. Oppenheim, Civil Action No. 15 cv 2357 (S.D.N.Y. Filed April 16, 2015). Both cases are pending.
Agreement: The Board announced that it has entered into a cooperative arrangement with the Auditors’ Public Oversight Authority of the Ministry for the National Economy of Hungary or APOA. The agreement, which is effective immediately, calls for the oversight of audit firms subject to the jurisdiction of the two regulators, contains a framework for joint inspections and provides for data protection and the exchange of confidential information.
Manipulation: The Australian Securities and Investment Commission banned Anton Kerstens from the securities business for five years. The order was based on findings that over a period of five months in 2012 he supported the price of Cauldron Energy shares as it was falling. Although some of his clients actually wanted to accumulate shares his strategy was not legitimate and undermined the integrity of the markets.
Corruption: The Serious Frauds Office announced charges of corruption and conspiracy against Alstom Network UK and Michael Anderson, employed as a business development director for Alstom Transport SA in France. The charges relate to January 1, 2006 and October 18, 2007 regarding the supply of trains to the Budapest Metro. This is the third phase of an investigation that began with a report to the SFO from the Attorney General in Switzerland regarding Alstom Group. Previously corruption charges were brought against Alstom Network UK Ltd and Graham Hill and Robert Hallett regarding India, Poland and Tunisia. That matter is awaiting trial. Microcap fraud, misappropriation by investment advisers and offering fraud cases were the focus of SEC enforcement this week. The Commission filed a microcap fraud action centered on blank check companies involving ten individuals. Two new actions focused on misappropriation by investment advisers while an additional two centered on offering fraud claims. An action was also brought based on a financial fraud that endured for over two decades.