The new Chairman continues to build out the senior staff, making key appointments. Specifically, the Chairman appointed: Jaime Klima, formerly co-chief of staff under Acting Chairman Piwowar, as his Chief Counsel; Lucas Moskowitz, formerly Chief Investigative Counsel of the U.S. Senate Committee on Banking, Housing and Urban Affairs, as Chief of Staff; Robert Stebbins, formerly a partner at Willkie Farr & Gallagher LP, as General Counsel; and William Hinman, formerly a partner at Simpson Thacher & Bartlett LLP, as Director of the Division of Corporation of Finance.
The Commission brought another fraudulent mark-up case this week. That action named two Nomura traders as defendants. The agency also: Brought an action against a chemical firm and its president centered on an unregistered note offering facilitated through a series of misrepresentations; and obtained a freeze order against a recidivist recently released from prison and still on supervised release and his firm, who was acting as an unregistered investment adviser and allegedly luring investors with tales false tales of trading expertise and safety for their investments. Finally, former major league baseball player Doug DeCinces was found guilty by a jury of insider trading, although the jury hung on a number of counts.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 4 civil injunctive cases and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Hadsell Chemical Processing, LLC, Civil Action No. 2:17-cv-432 (S.D. Ohio Filed May 17, 2017) is an action against the firm and its president, Robert Walton. Over a three year period beginning in 2012 Mr. Walton, through the firm, raised about $12 million through the offer and sale of unregistered promissory notes to 65 investors. Investors were falsely told that the notes were guaranteed by wealthy local business man Don Hadsell whose signature was forged on the notes and that the company was profitable although it was not – a claim bolstered by fake purchase orders. Most, if not all, of the investor funds have been expended. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b). Mr. Walton consented to the entry of a permanent injunction. Issues regarding disgorgement and penalties will be resolved at a later date. See Lit. Rel. No. 23835 (May 18, 2017).
Fraudulent mark-ups: SEC v. Im, Civil Action No. 1:17-cv-03613 (S.D.N.Y. Filed May 15, 2017); SEC v. Chan, Civil Action No. 1:17-cv-03605 (S.D.N.Y. Filed May 15, 2017). James Im and Kee Chan were registered representatives at Nomura International Securities, Inc. Defendants Im and Chan ran the CMBS trading desk from 2009 until Mr. Chan departed in 2012, after which Mr. Im continued to run the desk through 2014. CMBS are debt obligations that are illiquid. The secondary market for the securities is opaque. Purchasers and sellers had no reliable way to discern the prices paid by dealers such as Nomura except for disclosures made by the firm. Nomura customers who dealt in CMBS were typically investment advisers and other firms that managed funds. Essentially Nomura acted as an intermediary on the trades, buying and selling the securities and at times holding them briefly. During the trade negotiations the two traders frequently told one or both counterparties the other customer’s bid to buy or offer to sell the security, the prices at which Nomura bought or sold the bond, and/or the spread or commission that would be realized. Customers relied on those representations. In numerous instances, beginning in 2010 and continuing through their time with the firm, the two traders lied to customers about bids and offers made or received for the securities involved in transactions. These actions, along with others, inflated the spread, yielding hundreds of thousands of dollars in additional, fraudulent profit for the CMBS desk. The complaints allege violations of Securities Act Sections 17(a) and Exchange Act Sections 10(b). Mr. Chan resolve the charges with the Commission. He agreed to pay $51,965 in disgorgement along with prejudgment interest and a penalty of $150,000. He also consented to the entry of a bar from the securities business with the right to reapply after three years. The case as to Mr. Im is continuing.
Stop order: In the Matter of the Registration Statement of Emerald Isle Exploration Ltd, Adm. Proc. File No. 3-17983 (May 12, 2017) is a stop order proceeding alleging that the S-1 registration statement filed by the firm is false and misleading because, among other things, it incorrectly claims that the CEO is the sole officer, director and employee of the firm. The Order suspended the registration statement.
Fraudulent offering: In the Matter of Emerald Isle Exploration, Ltd., Adm. Proc. File No. 3-17982 (May 12, 2017) is an action which names as Respondents the exploration stage mining company, Samuell Eads, its CEO, and Lloyd Brewer, who secretly funded and controlled the company. The Order centers on conduct in 2013 and 2014. Respondents engaged in a fraudulent securities offering in which investors were not told that Mr. Brewer funded the firm and secretly controlled it. False company documents were also prepared which claimed there were 28 outside investors when in fact there were not. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 13(b)(2)(A) and 13(b)(5). To resolve the proceedings the firm consented to the entry of a cease and desist order based on each of the Sections cited in the Order except Section 13(b)(5). Messrs. Eads and Brewer also consented to the entry of cease and desist orders to resolve the proceedings, but based on each of the Sections cited in the Order. Mr. Eads agreed to pay a penalty of $10,000. Mr. Brewer was barred from acting as an officer or director of a public company for a period of five years and from participating in any penny stock offering with a right to reapply after five years. He will pay a civil penalty of $20,000.
Investment adviser fraud: SEC v. Ahmed, Civil Action No. 17-cv-1478 (D. Minn. Filed May 4, 2017) is an action which names as defendants Mohamud Abdi Ahmed and 2waytrading, LLC. The complaint alleges that Mr. Ahmed, previously convicted of wire fraud and out of prison on supervised release, while acting as an unregistered investment adviser induced potential clients with misrepresentations to permit him to trade in their brokerage accounts. Clients were assured his program was safe. In fact the trades were not. For example, he placed all of one client’s funds in a risky option trade that resulted in an 80% loss in one week. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The court recently entered a freeze order at the request of the Commission. See Lit. Rel. No. 23834 (May 12, 2017).
Insider trading: U.S. v. DeCinces, Case No. 8:12-cr-00269 (C.D. CA. Verdict May 12, 2017). Former major league baseball player Doug DeCinces was convicted by a Los Angeles jury following a 28 day trial on fourteen counts of insider trading. The jury was unable to reach a verdict on 18 additional counts. David Parker, a friend of Mr. DeCinces who was illegally tipped, was also found guilty. The jury was unable to reach a verdict as to James Mazzo, the CEO of Advanced Medical, who allegedly tipped Mr. DeCinces. The charges stem from the tender offer for Advanced Medical Optics Inc. by Abbott Laboratories Inc., announced on January 12, 2009. Mr. Decinces is alleged to have built a portfolio of 83,700 shares in the stock which ultimately netted him about $1.3 million. Previously, Mr. DeCinces and those he is alleged to have tipped – his physical therapist and two friends — settled insider trading charges with the SEC. Each defendant settled with the SEC, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Sections 10(b) and 14(e). In addition, Mr. DeCinces agreed to pay disgorgement of $1,282,691 along with prejudgment interest and a penalty of $1,197,998. Defendant Joseph Donahue agreed to pay disgorgement of $75,570 and a penalty of $37,785. Defendant Fred Jackson agreed to pay disgorgement of $140,259 along with prejudgment interest and a penalty of $140,259. Defendant Roger Wittenbach agreed to pay disgorgement of $201,692 along with prejudgment interest and a penalty of $214,906. SEC v. DeCinces, Civil Action No. 22-2268 (C.D. CA.).
Offering fraud: U.S. v. Moumen, Case No. 1:17-cr-77(E.D. Va.) is an action in which Tamer Moumen pleaded guilty to wire fraud in connection with his misuse of client funds supposedly invested in his firm, Crescent Ridge Capital Partners. Over a five year period beginning in 2012 Mr. Moumen solicited funds from over 50 investors, many near retirement, claiming he had a very successful trading record. In fact he had no experience managing a hedge fund and a loosing trading record. He also solicited funds for refugees which he comingled with the investor funds. Portions of the funds were diverted to his personal use. The date for sentencing has not been set.
MOU: The Securities and Futures Commission announced a cooperation agreement with the UK Financial Conduct Authority to foster collaboration in support of financial technology or Fintech innovation. The agreement follows the creation of the FCA’s Innovation Hub in 2014.