by T. GormanPosted on Posted in SECActions

The SEC brought another in a series of offering fraud cases. This one, however, does not focus on just one offering but three since mid- 2011. Promoters Robert Helms and Janniece Kaelin, their entities and Deven Sellers and Roland Barrera are named as defendants. SEC v. Helms, Civil Action No. 1:13-cv-1036 (W.D. Tx. Filed Dec. 3, 2013).

The first scheme centered on Vendetta Royalty Partners, Ltd. That partnership was formed in 2009. It acquired certain oil and gas royalty rights at that time. Subsequently, on August 15, 2011 Vendetta Partners filed a notice on Form D with the Commission. The Form stated that Vendetta Partners sought to raise $50 million by selling limited partnership interests. The PPM contained a series of misrepresentations including:

Prior sales: It claimed that there were no sales prior to the filing of the PPM which was false since there had been two for a combined investment of $275,000;

Experience: Representations regarding the industry experience of Mr. Helms at various firms were false since most of his experience was with Vendetta Royalty;

Litigation: Although the PPM claimed there were no material pending legal proceedings against the partnership, the general partner and its affiliates, in fact there was a material private suit alleging fraud and a state EPA action;

Commissions: While the PPM told investors that only modest commissions would be charged, in fact Defendants Deven Sellers and Roland Barrera were paid commissions of about $400,000 for a $3 million investment; and

Use of proceeds: The PPM told investors that the offering proceeds would be used to purchase royalty interests, pay 10% of Vendetta Partners’ credit facility and for promotional expenses when in fact most of the funds were misappropriated.

Mr. Helms and Ms. Kaelin also grossly understated bank loan payments made with the offering proceeds while concealing the fact that default was imminent. Overall, about $17.9 million was raised from 80 investors who purchased securities issued by Vendetta Royalty beginning in July 2011.

In July 2012 the defendants launched a second scheme, Vesta Partners. This venture claimed it would provide investors with predictable, quarterly cash distributions, an attractive yield and a 300% to 500% return within five to seven years, according to representations made to investors. In fact there was no basis for making these representations, according to the complaint.

Finally, in 2013 Rock Partners filed a Form D with the Commission signed by Defendant Helms. The firm sought to raise $300 million over a period of up to one year. This venture also claimed that within five to seven years investors would have returns of 300% to 500%. Again the claim is baseless, according to the complaint.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The Court granted a freeze order at the time the complaint was unsealed. The case is pending. See Lit. Rel. No. 2286 (Dec. 6, 2013).

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by T. GormanPosted on Posted in SECActions

Becoming involved with an SEC investigation is a bad day for any company and its executives. There are things that can be done to make it better. There are also ways to make it worse, much worse. Executives at Vitesse Semiconductor Corporation, when face with a possible option backdating investigation, are an example of how to make it worse.

Yatin Mody, initially the controller and later CFO of the company, contacted outside counsel in November 2005 regarding a press inquiry about the stock option practices of the company. Then current SEC filings of the company represented that stock options were granted at fair market value as of the date of the grant.

Following a review of company documents outside counsel raised a number of concerns. Specifically, outside counsel questioned whether the company had properly accounted for its stock options. Some grants appeared to have been backdated. For example:

April 12, 2001: The Compensation Committee meeting minutes for this date reflected grants for about 7.6 million shares with an exercise price of $17.438, the April 6, 2001 closing price, not the $25.70 price for the date of the meeting;

October 25, 2001: The Compensation Committee meeting minutes for this date reflected option grants for 15.3 million shares with an exercise price of $7.27, the October 2, 2001 closing price, not the $11.35 price on the date of the meeting.

Mr. Mody then held discussions with company founder and CEO Louis Tomasetta and former CFO Eugene Hovanec about the matter. Following the meeting, Mr. Mody created minutes for telephonic Compensation Committee meetings dated April 6, 2001 and October 2, 2001. The minutes were provided to outside counsel, noting that they had been created in November 2005.

In November 2006 the Wall Street Journal ran an article about stock option backdating. It cited the company. Outside counsel met with the board and senior management, raising concerns regarding the option practices at the company and the years later prepared minutes. The company was informed that there was a significant possibility of an SEC investigation.

In April 2006 the Audit Committee retained counsel. Audit Committee Counsel was directed to conduct an internal investigation regarding the option practices of the company. Audit Committee counsel requested access to the computer where the minutes of for the Compensation Committee were prepared.

Subsequently, on April 12, 2006 Messrs. Tomasetta, Hovanec and Mody created documents that purported to be minutes of meetings of the Compensation Committee on April l6, 2001 and October 2, 2001. The minutes authorized stock option grants. The electronic version of these minutes was then transferred to the computer where the minutes of the Compensation Committee were prepared. The internal clock of the computer was reset to make it appear that the minutes had been created at an earlier time.

Messrs. Tomasetta and Hovanec were named in an SEC option backdating complaint along with the company and others. SEC v. Vitesse Semiconductor Corporation, Civil Action No. 10 Civ. 9239 (S.D.N.Y. Filed Dec. 10, 2010)(the company settled on filing; the officers later settled; see Lit. Rel. No. 3295 (Sept. 27, 2013)). The two men were also named as defendants in a multi-count criminal indictment. It charged conspiracy, securities fraud, false entries in books and records of an issuer of securities, false filings with the SEC, false certification of financial reports and false statements to auditors. It also contained a forfeiture claim.

Messrs. Tomasetta and Hovanec each pleaded guilty to a superseding information charging conspiracy to destroy, alter, or falsify records relating the Vitesse’s April and October 2001 stock option grants. Last week each man was sentenced to serve three years probation. Each will also pay a $30,000 fine. U.S. v. Tomasetta, 10 crim 1205 (S.D.N.Y.).

Mr. Mody pleaded guilty to charges of securities fraud, making false entries in the financial records of a company and conspiracy under a cooperation agreement. He is awaiting sentencing.

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