This Week In Securities Litigation (Week ending July 31, 2015)
The Government requested that the Supreme Court overturn U.S. v. Newman, the Second Circuit’s decision on tipping and the personal benefit test. Previously, the Second Circuit had declined a request to either rehear the case or consider it en banc.
The SEC filed another settled FCPA action this week. It centered on payments made by a medical supply company to health care personnel employed by state owned enterprises in China. The Commission also filed and offering fraud case and a settled action involving an investment adviser who did not fully disclose compensation received in under agreements with a broker and two funds.
Supreme Court
Insider trading: The government filed a petition for certiorari in U.S. v. Newman, seeking to overturn the Second Circuit’s controversial tipping decision. The petition argues that the Second Circuit panel decision conflicts with the Supreme Court’s decision Dirks and the decision of the Ninth Circuit in Salman. U.S. v. Newman (S.Ct. Filed August 30, 2015).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 1 civil injunctive cases and 2 administrative actions, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Griffin (N.D.N.Y. Filed July 30, 2015) is an action which names as defendants James Griffin, John Wolle, 54Freedom Inc. and several related entities. Mr. Griffin is the founder and CEO of 54Freedom while Mr. Wolle is the CFO. Beginning in 2007, and continuing until at least 2014, the defendants are alleged to have engaged in a series of offering frauds, selling interest in 54Freedom with outlandish promises. About $8 million was raised, at least $1.2 million of which was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. Parallel criminal charges have been brought by the U.S. Attorney’s Office for the Northern District of New York.
Misrepresentations: SEC v. ABS Manager, LLC, Civil Action No. 13-cv-00319 (S.D. Cal.) is a previously filed action against ABS Manager, LLC and George Price. The complaint alleged that beginning in 2009, and continuing until early 2013, the defendants made material misrepresentations and omissions to investors regarding the risks associated with investing in three investment funds they managed. The defendants settled with the SEC and the Court entered final judgments of permanent injunctions based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). In addition, the defendants were, jointly and severally, directed to pay $362,648.83 in disgorgement, prejudgment interest and, respectively, penalties of $725,000 and $150,000. See Lit. Rel. No. 23313 (July 30, 2015).
Unregistered brokers: In the Matter of David B. Hananich, Jr., Adm. Proc. File No. 3-16354 (July 28, 2015) is a previously filed action which named as Respondents Mr. Hananich, a cofounder and director of Diversified Energy Group, Inc.; Carmine DellaSala, also a co-founder of Diversified; Matthew Welch, a vice president of Diversified and a board member of St. Vincent, a firm investors were told was a charity; Richard Scurlock, III, the owner of RTAG, a state registered investment adviser; RTAG Inc.; Tax Advisory Group; Jose Carrio and Dennis Karasik, co-founders of Respondent Carrio, Karasik & Associates, LLP, a wealth management firm; and Michael Salovay, a one-time registered representative. From 2006 through 2008 investors were solicited to purchase interests in Diversified and offered stock at prices ranging from 20 cents to $1.55 per share. A PPM was used. The shares were unregistered. Subsequently, from 2009 through 2012 investors were solicited to purchase Diversified bonds which had a coupon rate of 8% to 10.25%. Some of the bonds included an option to acquire stock. There was no registration in effect for the bonds. About $16.5 million was raised. To effectuate the sales of Diversified interests, unregistered sales agents were used. Those agents were paid a commission of either 5% or 10%. The agents included Mr. Scurlock and RTAG and Messrs. Carrio and Karasik and CKA and Mr. Salovay. In soliciting investors misrepresentations regarding the financial performance of Diversified were made. Additional misrepresentations were made regarding the firm’s use of experts for advice. In addition, Messrs. Havanich, Dellasla and Welch touted their relationship with St. Vincent. The firm had no relationship to the well-known charity of St. Vincent de Paul, a voluntary Catholic organization. The Order alleges violations of Exchange Act Section 15(a). Messrs. Karasik, Carrio and their firm, Carrio, Karasik and Associates resolved the charges, each consenting to the entry of a cease and desist order based on Section 15(a). Each also agreed to be barred from the securities business and from participating in any penny stock offering. In addition, each settling Respondent agreed to pay disgorgement and to future proceedings which will determine the amount plus prejudgment interest if, ordered, and a penalty if appropriate.
Disclosure of fees: In the Matter of Dion Money Management, LLC, Adm. Proc. File No. 3-16702 (July 24, 2015). Dion Money Management is a registered investment adviser. Most clients used Broker A for custody. Beginning in 2002 the adviser entered into service agreements with an administrator to a Family of Funds B, a distributor for Family of Funds C and a Custodial Support Agreement with Broker A. With Family of Funds B the adviser had an arrangement under which it was paid a fee based on the amount of client assets invested in select funds in exchange for providing recordkeeping and administration services for those clients. After a number of modifications, in 2005 the adviser received a payment of 20 basis points up to certain limits. With Fund Family C the adviser entered into a similar arrangement, although the payment rate was 30 basis points. Under the arrangement with Broker A the adviser was compensated on a quarterly basis based on the percentage of client assets held in custody with the Broker that were invested in certain mutual funds on the brokers no-transaction–fee platform. Dion Money Management made certain disclosures regarding the arrangements listed above in its Form ADV which disclosed them but did not specifically state it could receive payments greater than 30 basis points as a result of the arrangement with Broker A. The Order alleges violations of Advisers Act Section 206(2) and 207. Dion Money Management resolved the charges. The firm will implement a series of undertakings which include amending the provisions of its current Form ADV and providing notice to clients of the Order and certifying compliance. The adviser also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. It will pay a civil money payment of $50,000. Disgorgement was not ordered.
FCPA
In the Matter of Mead Johnson Nutrition Company, Adm. Proc. File No. 3-16704 (July 28, 2015). Mead Johnson is a global manufacturer and marketer of infant formula and child nutrition products. The firm has subsidiaries which operate in various parts of the world. Subsidiary Mead Johnson China operates in the PRC where the firm began doing business in the1990s. By 2013 the company had operations in 241 cities in China.
Part of Mead Johnson’s marketing from 2008 through 2013 was through the medical sector which included health care facilities and health care professionals. The firm’s China subsidiary used third-party distributors to market, sell and distribute products in the country. Mead Johnson China’s sales personnel marketed through medical channels and health care facilities. Health care professionals at the facilities were encouraged to recommend the company products. Incentives to make that recommendation and collect certain information were provided in the form of cash payments and other things, contrary to company policy. The payments were made from the distributor allowance retained by the distributor but controlled by the firm. The firm failed to devise and maintain adequate systems of internal controls over the operations of its China subsidiary to ensure that the sales expenditures through its distributors were not used for unauthorized or improper purposes.
In 2011 the firm received information about possible violations of the FCPA which an investigation failed to uncover, although later the practices were halted. A second investigation, commenced in 2013, discovered the violations. The company cooperated with the SEC and undertook significant remedial measures. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter the company consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the company will pay disgorgement of $7,770,000, prejudgment interest and a civil monetary penalty of $3 million.
FINRA
Data reporting: The regulator fined Goldman Sachs Execution & Clearing, L.P. $1.8 million for failing to accurately submit trade reports to the appropriate FINRA Trade Reporting Facility. Specifically, the firm failed to transmit all applicable order information for Order Audit Trail System or OATS in a complete and accurate manner for about seven years. The firm also furnished inaccurate data for a large number of order-related events for over eight years and did not have adequate supervisory systems.
Criminal cases
Insider trading: U.S. v. Braverman, No. 1:14-cr-00748 (S.D.N.Y.) is an action charging former Dimitry Braverman, formerly a clerk at Wilson Sonsini, with insider trading. The charges alleged that he traded on inside information misappropriated from the firm on at least four occasions. He pleaded guilty to one count of securities fraud and as sentenced to serve twenty-four months in prison. See also SEC v. Braverman, Civil Action No. 14 cv 7482 (S.D.N.Y.).
Australia
Unregistered broker: The Australian Securities and Investment Commission initiated a proceeding against Dr. Roger Munro and Mrs. Kathleen Munro who are alleged to have raised about $1.5 million from investors for trading without registering with the agency as required. Although investors have been told the trades are profitable, records suggest the contrary. Portions of the investor funds have been transferred to a brokerage account in the name of Mrs. Munro.
Expenses: The ASCI announced that beginning July 29, 2015 it will seek to recover the cost of investigations where there has been a successful prosecution or civil proceeding against a person. The action is being taken under a provision of the Australian Securities and Investments Commission Act of 2001.
Directors: The ASIC banned Trevor Seymour , formerly a director of financial services firm Provident Capital Limited, from managing a corporation and providing financial services for three years. The action is based on the filing of false and misleading reports and a false prospectus used for a debenture offering. Mr. Seymour is the third director of the firm to be penalized.
Unregistered securities: The regulator secured a judgment against Astra Resources PLC and its subsidiary, Astra Consolidated Nominees Pty Ltd, for selling securities without registering a prospectus. About $6.5 million was raised from 300 investors over a period of about one year beginning September 2011. Remedies will be considered in the future.
Hong Kong
Reporting: The Securities and Futures Commission fined Nomura International (Hong Kong) Limited $4.5 million for failing to report significant misconduct by a former trader in a timely fashion. Specifically, when the firm reported on June 11, 2013 that a trader had lost US$3.5 million and had been sent back to Japan, it also knew he had made false entries to cover the transactions and had launched an investigation into the matters, none of which was reported until later.
Disclosure: The SFC initiated a proceeding against AcrossAsia Ltd and its chairman, Albert Cheok and CEO, Vincent Ang, for failing to disclose material information as soon as practicable. The action arose from a related litigation in Indonesia involving the company where in fact the information was disclosed.