by T. GormanPosted on Posted in SECActions

The SEC suffered another trial loss when a Kansas jury returned a verdict against the agency in an enforcement action brought against NIC, Inc. CFO Stephen Kovzan, SEC v. Kovzan, Civil Action No. 2:11-cv-02017 (D. Ka. Filed Jan. 12, 2011).

The action centered largely on the characterization of a number of expenses company founder, board member and CEO Jeffery Fraser claimed business expenses booked by the company. Specifically, the claims against Mr. Kovzan, and in a parallel complaint filed against the company and three of its officers, alleged that from 2002 through 2005 Mr. Fraser falsely claimed that he worked essentially for free while charging many of his expenses to the company. Those included items such as $4,000 per month to live in a ski lodge in Wyoming andmonthly cash payments for rent on a home owned by an entity he controlled, travel costs, and other perquisites. These, and other perquisites not reported as income by the company, totaled over $1 million, according to the Commission.

Mr. Kovzan, Chief Accounting Officer, authorized the payments and knew, or was reckless in not knowing, that they circumvented company policy, according to the complaint. The false reporting in Commission filings continued even after a whistleblower complaint and the initiation of the SEC’s investigation. The Commission’s complaint alleged violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) and Securities Act Section 17(a).

Motions for summary judgment on various expense categories by both parties were denied with the Court concluding that there were disputes of fact requiring resolution by the jury. For example, the SEC claimed that “commuting expenses for travel between Mr. Fraser’s Wyoming home and company headquarters in Kansas was a form of remuneration requiring disclosure.” This issue hinges in large part on the definition of commuting, according to the Court. Neither party offered an appropriate definition. The resolution of this issue, largely based on a standard dictionary definition, involves “the factual determination whether particular travel constitutes ‘commuting’ [and] could include consideration of the extent to which an executive’s choice of residence is related to his job, and thus the extent to which the executive’s choice of residence is a matter of mere personal convenience or desire,” the Court concluded. This is a question for the jury.

Similarly, the Court rejected defendant’s request for summary judgment on the SEC’s claims based on payments for Mr. Fraser’s residences in Wyoming and Kansas City. Characterizing the issue here as whether “this expense was directly related to performance of Mr. Fraser’s job,” the Court concluded that it is a factual issues which must be resolved by the jury.

Finally, the Court also refused to grant summary judgment on a category of “other” expenses. While the defendant claimed that the Commission could not establish its claims here, the Court noted that the “most striking such evidence [offered by the Commission] is that NIC in fact required Mr. Fraser to reimburse NIC for more than $280,000 in expenses that could not be supported as business expenses under NIC’s policies.” While Mr. Kovzan argued that the company utilized a different standard in making that determination than the one relied on by the Commission, “the fact that NIC at least found such violations of its policies provides evidence from which a jury could conclude that the expenses at issue were not proper business expenses” the Court concluded. Thus, again the question is one for the jury.

The jury did in fact resolve the disputes of fact which precluded the Court from granting summary judgment. The jury found against the SEC on each claim.

Prior to trial, and at the time the complaints were filed, NIC and three of its officers settled. SEC v. NIC, Inc., Civil Action No. 2:11-CV-02016 (D. Ka. Filed Jan. 12, 2011). NIC consented to the entry of an injunction prohibiting future violations of the Sections cited in the complaint. The company agreed to hire an independent consultant to recommend new policies. Mr. Fraser settled, consenting to the entry of a substantially similar injunction and agreeing to pay disgorgement in the amount of $1,184,246 along with prejudgment interest and a $500,000 civil penalty. Mr. Fraser also agreed to the entry of an officer director bar.

Former COO Harry Herington also settled, consenting to the entry of an injunction on similar terms and agreeing to pay a civil penalty of $200,000. In addition, Mr. Herington agreed to the entry of an order in an anticipated administrative proceeding which will prohibit him from practicing before the Commission as an accountant with a right to reapply after one year. Finally, former CFO Eric Bur settled, consenting to the entry of an injunction prohibiting future violations of Exchange Act Rules 13a-14 and 13b-1 and aiding and abetting NIC’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) and the related rules.

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by T. GormanPosted on Posted in SECActions

The SEC filed a settled, insider trading and Rule 105 short selling action against a seasoned trader and his two trading vehicles. SEC v. Langston, Civil Action No. 1:13-cv-324360 (S.D. Fla. Filed Dec. 3, 2013).

Defendant Charles Langston is a long time securities trader. He actively trades through two controlled entities, defendants CRL Management, LLC and Guarantee Reinsurance, LTD. In March 2010 Mr. Langston opened an account for CRL Management at Chardan Capital Markets, LLC, a New York City based registered broker dealer and investment bank. Previously, AutoChina International Ltd. retained Chardan and another broker, Rodman & Renshaw, LLC, to locate potential investors for a follow-on offering. AutoChina is a PRC based company involved in the commercial vehicle and sales business. Shares of the company are registered for trading in the U.S.

In late March 2013 Chardan contacted a Langston associate about a deal involving AutoChina. The e-mail message noted that Mr. Langston would have to be approved to receive the transaction information and agree to keep it confidential. The morning day, March 23, 2010, there was a series of communications between Chardan and Mr. Langston’s representative. The communications stated that the next day there would be an offering for which the pricing would be determined. Also included was a Confidentiality and Non-Disclosure Agreement which provided that the information must remain confidential and could not be used “in connection with any investment outside the nature and scope of the proposed investment opportunity.” A subsequent e-mail stated that AutoChina was selling $100 million worth of its shares.

Later the same morning, Chardan provided Mr. Langston’s representative with confidential investor presentation on the AutoChina deal. It included an overview of the company’s business, growth projections, information about the current target market and other financial data. Within less than two hours Mr. Langston placed an order for the Guarantee Reinsurance account to sell short AutoChina’s shares.

That afternoon Rodman sent Langston’s associate the final transaction materials which included the $35 per share offering price. The deal announcement was expected pre-market opening the next day. Mr. Langston continued to sell AutoChina’s shares short. By the end of the day he had sold 29,000 shares short at an average price of $41.75. That same afternoon Langston’s associate sent Chardan a securities purchase agreement executed by Mr. Langston on behalf of CRL Management, subscribing for 40,000 shares at $35 per share.

The next day Mr. Langston purchased 29,000 shares of AutoChina stock for Guarantee Reinsurance’s account at an average price of $35.094, a 17% discount to the prior day closing price. By the end of the day the shares of AutoChina closed down about 15% on news of the offering. Overall Mr. Langston had trading profits of $193, 108.

In the two years prior to the AutoChina deal, the defendants engaged in manipulative short selling on three occasions, according to the complaint. Rule 105 prohibits any person from selling an equity security short during a pre-offering restrictive period that begins “five business days before the pricing of the offered securities and ending with such pricing.” Defendants engaged in prohibited activity once in 2009 and twice in 2008:

Alcoa trades: In March 2009 during the restricted period Mr. Langston, through the account of Guaranteed Reinsurance, sold short 500,000 shares of Alcoa. He then purchased 1 million shares in the offering. These transactions resulted in profits of over $500,000.

Mitsubishi trades: In December 2008 during the restricted period Mr. Langston sold short 200,000 shares and later purchased 500,000 shares in the offering. The transactions yielded gains of over $190,000.

Wells Fargo trades: Over four days during the restricted period in November 2008 Mr. Langston, in accounts held in the names of his two entities, sold short 489,000 shares of Wells Fargo. Later the defendants purchase a total of 258,000 shares of Wells Fargo from three different underwriters. Overall the defendants had a gain of over $600,000.

The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Rule 105 of Regulation M.

Mr. Langston agreed to settle the insider trading charges, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement of $193,108 along with prejudgment interest and a civil penalty equal to the amount of the disgorgement. The three defendants also consented to the entry of permanent injunctions base on Rule 105. Monetary sanctions will be determined by the Court at a later date. See Lit. Rel. No. 22882 (Dec. 3, 2013).

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