The number of settlements in securities class actions increased last year, according to Cornerstone Research. That fact, along with a finding that the amount of those settlements also increased, is detailed in the firm’s latest report on securities class actions.
The SEC adopted a rule amendment this week, shortening the settlement time for securities transactions. The Commission also filed two settled insider trading cases in which an a person with inside information about a corporate acquisition furnished it to a friend who traded. The agency also filed an offering fraud action centered on a fraud in which the owner of a firm told potential investors that the company had secured a license in connection with its purported marijuana business. In fact it did not.
The Manhattan U.S. Attorney’s Office also filed an offering fraud action. The case centered on claims that a technology firm with virtually not assets was profitable. In the Eastern District of New York prosecutors obtained a guilty plea in another offering fraud case where investors were falsely told that the firm was managing millions of dollars and had a team of investment professionals.
Rules: The Commission adopted a rule amendment this week which shortened the settlement cycle from T+ 3 to T +2 (here).
Seminars: The Commission announced the schedule for the 2017 Compliance Outreach Program Seminars for Investment Companies and Investment Advisers (here).
Securities Class Actions
The trends in securities class actions are up – more settlements, and more dollars — as detailed in the latest report from Cornerstone Research titled Securities Class Action Settlements – 2016 Review and Analysis (here). The trends in securities class action settlements are evidenced by key statistics. The largest settlement in 2016 was $1.575 billion compared to $982.8 million the prior year. The minimum settlement in 2016 was $0.9 million compared to $0.4 the prior year. Similarly, the average settlement amount increased to $70.5 million in 2016 from $38.4 million the year before. And, the number of settlements in 2016 increased to 85 compared to 80 the prior year.
Last year the number of mega settlements was the highest in 10 years. The number of settlements over $100 million almost doubled in 2016 compared to the prior year. Four of the ten approved mega settlement in 2016 were between $100 million and $250 million; four were between $250 million and $500 million; and two exceeded $1 billion. Last year is the first since 2006 that there were two settlements over $1 billion in a single year. At the same time the number of what Cornerstone calls “nuisance settlements” those under $2 million) declined from 25% in 2015 to 12% in 2016.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 3 civil injunctive case and 1 administrative proceeding, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Hartung, Civil Action No. 17 CV 01307 (E.D. Pa. Filed March 23, 2017) is an action against Steven Hartung. Mr. Hartung was tipped by a relative who worked at Merck & Co. about his employer’s then pending acquisition of Idenix Pharmaceuticals, Inc., announced on June 9, 2014. Mr. Hartung purchased 3,345 shares of Idenix yielding profits of $59,688 following the deal announcement. The complaint charged him with violations of Exchange Act Sections 10(b) and 14(e). To resolve the action Mr. Hartung consented to the entry of a permanent inunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement in an amount equal to his trading profits, prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 23786 (March 23 2017).
Insider trading: SEC v. Ludwig, Civil Action No. 1:17-cv-00331 (E.D. Va. Filed March 23, 2017) is an action against Christopher Ludwig. Mr. Ludwig is alleged to have been receiced inside information from a long time friend who was a consultant to Verso Corporation about its acquisition of NewPage Holdings Inc., announced on January 6, 2014. Prior to that date Mr. Ludwig purchased shares of NewPage despite an agreement not to act on the information. He had profits of about $30,000 following the deal announcement. The complaint alleges violations of Exchange Act Section 10(b). To resolve the matter Mr. Ludwig consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. He also agreed to pay disgorgement of $30,616.69, prejudgment interest and a civil penalty of $16,440.01. See Lit. Rel. No. 23784 (March 23, 2017).
Blank check companies: In the Matter of Sheldon Rose, Adm. Proc. File No. 3-17559 (March 23, 2017) is a proceeding which names as Respondents, Sheldon Rose, the sole officer of Premier Nursing Products Corporation, and an undisclosed control person of 16 other blank check companies, and MKJJ, a limited liability company controlled by Respondent Rose. The action centers on the sale of 15 blank check companies by Mr. Rose and MKJJ as the alter ego of Mr. Rose. Mr. Rose is alleged to have followed a basic blueprint of creating and selling blank check companies as public companies without disclosing the true purpose or control of the entities. The Order alleges violations of 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). Respondent Rose entered into a plea agreement in a related criminal case under which he will plead guilty to one count of conspiracy to commit securities fraud. In this proceeding he will pay disgorgement of $2,734,497 and prejudgment interest.
Insider trading: SEC v. Maciocio, Civil Action No. 1:16-cv-4139 (S.D.N.Y.) is a previously filed action against Michael Maciocio, formerly employed at a pharmaceutical firm, and his childhood friend and broker, David Hobson. The Commission’s complaint alleged that Mr. Maciocio obtained inside information from his employer regarding other firms of interest, tipped his friend and both men traded, reaping profits. Both men previously pleaded guilty to insider trading charges in the parallel criminal case. Mr. Maciocio is awaiting sentencing. Mr. Hobs was sentenced to serve 6 months in prison and ordered to forfeit $385,664.39 and pay a special assessment of $200. In the Commission’s case each defendant consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, Mr. Maciocio was ordered to pay disgorgement of $116,779.42 and prejudgment interest which will be satisfied by paying the forfeiture ordered in the criminal case. Mr. Hobson was directed to pay disgorgement of $311,168.40 along with prejudgment interest which will be satisfied by paying the forfeiture order in the parallel criminal case. See Lit. Rel. No. 23783 (March 20, 2017).
Offering fraud: SEC v. Miller, Civil Action No. 17-cv-20933 (S.D. Fla. Filed March 13, 2017) is an action which names Jerry Miller as a defendant. He is the principal of a consulting firm to several microcap issuers. Mr. Miller issued a false press release which asserted that Petrotech Oil and Gas, Inc. had obtained a license from the state of Colorado in connection with its purported marijuana business. The release also contained business projections based on having obtained the license. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23782 (March 20 2017).
Offering fraud: U.S. v. Liburdi (S.D.N.Y.) is an action charging Maryse Liburdi with one count of wire fraud in a criminal complaint centered on an offering fraud scheme. Specifically, Ms. Liburdi is alleged to have raised over $6 million over several years by convincing persons to invest in her technology company which she clamed was very successful and profitable. In fact the company’s bank records show it always had little cash. To conceal this fact Ms. Liburdi on occasion wrote large checks on other accounts to the firm. The checks were, however, written on accounts with insufficient funds. Ms. Liburdi is alleged to have misappropriated the funds. The case is pending.
Offering fraud: U.S. v. Schiro, Case No. 1:17-cr-00130 (E.D.N.Y.). Patrick Schiro is the founder of Black Rock Morgan LLC, supposedly an investment management firm. Over a period of about fifteen months, beginning in July 2014, Mr. Schiro raised at least $440,000 from five investors. The sales pitch used by Mr. Schiro is perhaps typified by his representations to one individual. There the potential investor was told that Black Rock had many clients, managed million of dollars and had a team of investment professionals with deep sector specific experience and numerous clients. Clients were not told Mr. Schiro is a securities law recidivist. Most of the investor funds were diverted to paying the personal expenses of Mr. Schiro. Mr. Schiro pleaded guilty to one count of wire fraud on Friday. Sentencing is scheduled for August 2, 2017.
Director filings: Angus Holt, Executive Chairman of Optiscan Imaging Limited, between February 2009 and 2016 repeatedly failed to notify the Australian Securities and Investment Commission of his share trades within two weeks as required. Accordingly, he was convicted on nine counts of violating the statute and fined $4,500.
Offering fraud: The Securities and Futures Commission obtained an interim order from the Court of First Instance freezing about $2.66 million in the bank accounts of Heriberto Perez Valdez and those of Sealand Trading (Hong Kong) Ltd. The SFC believes that Mr. Valdes was involved in a scheme operated by DFRF Enterprises LLC and its owner, Daniel Fernandes Rojo Fiho which was Ponzi scheme. Sealand Trading is alleged to have received some investor money in the scheme. Investors in the scheme were told that the firm was about to be listed for trading in the U.S. which was false.
Insider trading: The Securities and Exchange Surveillance Commission recommended that a penalty be imposed on Prospect Asset Management, Inc. for insider trading in the shares of tri-Stage Inc. Prospect is a Hawaiian company that manages Shareholders’ Consensus Fund L.P, a Cayman Island limited partnership. Prospect’s investment officer learned that Tri-Stage had decided to repurchase its shares. Prior to the announcement Prospect repurchased 36,500 shares for 74,767,600 yen. The amount of the penalty to be imposed in 3,290,000 yen (about $30,000). The SESC thanked the U.S. Securities and Exchange Commission for its assistance.
Manipulation: The SESC recommended that Celera Global Ltd., a Virgin Islands firm, be fined 13,320,000 yen (about $120,000) for manipulating the shares of Ezaki Glico Co. Ltd. and Kanamoto Co. Ltd. Celera is a trading firm. In each instance the firm engaged in layering or spoofing to manipulate the share price.