The blistering pace at which the Commission filed new enforcement actions as the fiscal year end drew near has clearly ended. This week the agency filed one enforcement action while announcing the settlement of a previously filed case.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 1 civil injunctive case and no administrative proceedings, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Faulkner, Civil Action No. 3:16-cv-01735 (N.D. Tx. Filed June 24, 2016) is a previously filed action which named as defendants: Christopher Faulkner, known as the Frack Master from his TV and radio appearances, President and CEO of defendant Breitling Energy Corporation, registered under Section 12(b) with the SEC; Breitling Oil & Gas Corporation; Crude Energy, LLC and Patriot Energy, Inc., both controlled by Mr. Faulkner; Jeremy Wagers, a Texas Attorney; Judson Hoover, a CPA and Breitling Energy Corp. CFO; Parker Hallam, co-founded of Breitling and president of defendant Crude Energy; Joseph Simo, the owner of Simo Energy, LLC, a Dallas petroleum geology consulting firm that services Breitling Oil, Breitling Energy, Crude Energy and Patriot Energy; Dustin Miller Rodreguez, co-founder of Breitling Oil and its CIO; Beth Handkins, Crude Energy’s COO; and Gilbert Steedly, Breitling Energy’s v.p. of capital markets. Frack Master Faulkner created a fraudulent offering scheme using Breitling Oil which was later essentially replicated with other firms, including publically traded Breitling Energy. He began in 2011 with privately held Breitling Oil. The firm told investors it was offering “turnkey” oil and gas working interests. Mr. Faulkner ran the operations in large measure while Messrs. Hallam and Miller directed the sale process. The sales process was built on a series of misrepresentations about Mr. Faulkner’s background, the costs of developing the properties and ended with the misuse of investor funds. Investors were also furnished information from geologist Joseph Simo who was represented to be independent when he was not. By repeatedly replicating this scheme Defendants raised about $80 million in more than 20 oil and gas offerings from hundreds of investors. Mr. Faulkner misappropriated at least $30 million. The Commission’s complaint alleged violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) and 16(a). Mr. Faulkner settled with the Commission, consenting to the entry of permanent injunctions and agreeing to pay $23.8 million in disgorgement. He also agreed to the entry of a director and officer bar and a penny stock bar. Mr. Faulkner, in addition, settled with the U.S. Attorney’s office in the parallel criminal case based on charges of securities fraud, money laundering and tax evasion. He will serve 12 years in prison. U.S. v. Faulkner, No. 3:18-cr-00500 (N.D. Tx.).
Manipulation: SEC v. Fisher, Civil Action No. 9:18-cv-81428 (S.D. Fl. Filed Oct. 22, 2018) is an action which names as defendants Mark Fisher, an attorney whose license is inactive, and Joseph Capuozzo, the President of microcap issuer Valentine Beauty Inc. The case centers on a scheme involving the company and two named defendants as well as Eddy Marin and Mark Spierdowis. The scheme began in November 2013. Mr. Marin, who controlled Valentine Beauty, caused the firm to issue shares to affiliated individuals and entities including the named defendants. More than 50 million free trading shares – about 90% of the float – was issued. Mr. Fisher received a block that included 2 million shares that were issued based on his false opinion letter. Subsequently, Messrs. Fisher and Capuozzo began a coordinated marketing campaign using firm press releases coupled with internet and email touts which focused on the liquidity of the stock. Defendants coordinated their stock transactions, reaping profits of $100,132 for Mr. Fischer and $52,516 for Mr. Capuozzo. The complaint alleges violations of Securities Act sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act section 10(b). Each Defendant agreed to settle the case. Each consented to the entry of a permanent injunction based on the sections cited in the complaint. Each agreed to the entry of a permanent penny stock bar. Mr. Capuozzo, in addition, agreed to the entry of an officer and director bar. Monetary relief will be considered by the Court at a later date. The U.S. Attorney’s Office for the Southern District of Florida filed parallel criminal charges. See Lit. Rel. No. 24322 (Oct. 22, 2018).
Manipulation: U.S. v. Hand, No. 1:15-cr-10386 (D. Mass.) is an action in which Jehu Hand, a securities attorney, is the defendant. Mr. Hand was convicted in May 2018 following a 13-day trial, of conspiracy, securities fraud and wire fraud. The Court sentenced him this week to serve 66 months in prison followed by three years of supervised release. Restitution will be addressed at a later date. The charges were based on two fraudulent stock manipulation schemes which caused more than $1.5 million in losses. One scheme involved the shares of Greenway Technology while the other centered on those of Crown Marketing. The schemes were similar. Mr. Hand and others concealed their ownership of large blocks of shares, false opinions were sent to the transfer agents in one scheme, stock promoters were hired to push up the price and false and misleading statements were made to investors who purchased shares. See also SEC v. Hand, Civil Action No. 1:15-cv-14109 (D. Mass.).
Manipulation: U.S. v. Knox, No. 1:8-cr-10385 (D. Mass.). Roger Knox is a U.K. national residing in Switzerland. He was indicted on one count of securities fraud and one count of conspiracy to commit securities fraud. The indictment followed his arrest earlier this month. Mr. Knox ran a firm initially known as Silverton but later renamed Wintercap. It claimed to be an asset manager. In fact the firm served as a vehicle for selling massive amounts of penny stock on behalf of so-called “control groups” — those who secretly own large blocks of penny stocks through a variety of entities and accounts. The transactions were part of campaigns by those who actually controlled the shares to artificially inflate the share price and trading volume. Stated differently, Mr. Knox facilitated international pump-and-dump manipulation schemes, according to the charges. In the end Mr. Knox channeled the funds back to persons in the “control groups” located in the United States and other jurisdictions. The trading profits were thus returned to those who controlled the shares. The case is pending. See also SEC v. Knox, Civil Action No. 1:16-cv-12858 (D. Mass.).
Study: The Australian Securities and Investment Commission released a report of a pilot study by the Law Faculty of the University of New South Wales on the deterrent effect of Enforceable Undertakings on peer financial services and credit providers. The study was commissioned in June 2017 as a pilot in response to a recommendation of the Australian National Audit Office that the ASIC should periodically assess the effectiveness of enforceable undertakings (here).
Remarks: Cathie Armour, Commissioner, Australian Securities and Investment Commission, delivered remarks at the ISDA Annual Australia Conference (Oct. 23, 2018). Her remarks began with a review of market conduct in the OTC derivatives markets and reviewed certain reforms and Australia’s implementation of the G20 OTC derivatives reforms (here).
Manipulation: The Serious Frauds Office announced charges against Andreas Hauschile for conspiracy to defraud in connection with its investigation into the manipulation of the Euro Interbank Offered Rate. Mr. Hauschild had been arrested in Italy and returned to the U.K.