by T. GormanPosted on Posted in SECActions

Professionals seem to becoming into the cross hairs of insider trading enforcement. Last week the Commission filed a series of insider trading cases centered on Georgia based CPA Thomas Melvin who had been consulted by a corporate board member, learned about a pending take-over and traded and tipped others. SEC v. Melvin, Case No. 1:12-cv-02984 (N.D. Ga. Filed August 28, 2012). Now the SEC has filed a settled insider trading action against a public relations specialist under similar circumstances. SEC v. Fraser, Civil Action No. CV 12-7574 (C.D. Ca. Filed Sept. 5, 2012).

Renee Fraser is the founder and chief executive officer of public relations firm Fraser Communications. On October 14, 2009 East West Bancorp or EWBC, a Pasadena, California based institution whose shares are traded on the Nasdaq Global Select Market, contacted Fraser Communications in connection with what is described as an “FDIC assisted transaction.” Confidentiality agreements were requested and obtained from the communications company and six of the firm’s employees on October 15, 2009, the date the firm was engaged for the transaction. The specific employees who signed the agreements were not specified.

The next morning Ms. Fraser purchased 10,000 shares of EWBC through her brokerage account at Morgan Stanley at an average price of about $9 per share. Less than one month later, on November 6, 2009, EWBC publically announced the acquisition of United Commercial Bank’s banking operations in an FDIC assisted transaction. Subsequently, on November 10, 2009, Ms. Fraser sold 7,500 of her EWBC shares. The remaining shares were sold on June 24, 2011. Profits from the sale totaled $43,868.

Ms. Fraser, who was given access to unspecified information solely for corporate purposes, breached her fiduciary duty to EWBC and its shareholders by purchasing the stock, according to the complaint. That complaint alleges violations of Exchange Act Section 10(b).

Ms. Fraser settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). She also agreed to pay $43,868 in disgorgement along with prejudgment interest and a penalty equal to the amount of the disgorgement. In addition, Ms. Fraser agreed to be permanently barred from serving as an officer or director of a public company.

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by T. GormanPosted on Posted in SECActions

Chinese companies that went public through a reverse merger continue to be the subject of Commission enforcement actions. This time China Sky One Medical, Inc., along with its chairman, Yan-Qing Liu, were named as defendants in a financial fraud complaint. SEC v. China Sky One Medical, Inc., Civil Action No. CV12-7543 (C.D. Cal. Filed Sept. 4, 2012).

China Sky One or CSKI is a holding company that conducts business through subsidiaries in the Peoples Republic of China. In May 2006 the company conducted a reverse merger. Its shares were initially traded on the American Stock Exchange and later on the NASDAQ Global Market. The company makes and sells Chinese medical, health and beauty products, including pain relief and weight loss patches.

In its Form 10-K for 2007 and a subsequent 10-Q the company reported it had entered into a strategic distribution agreement with Takasima Industries (M) Sdn. Bhd., a fitness equipment manufacturer and retailer based in Penang, Malaysia. Under the agreement Takasima would become an exclusive sales agent of CSKI’s slim patches in Malaysia. The company planned to repackage the product and sell it under its name. CSKI’s management stated that the agreement was expected to produce about US $12 million in annual sales in 2007 with a net profit margin of about 20%. The representations were false, according to the complaint.

The Form 10-K also represented that Ningbo Yuehua International Trading Company and Guangzhou Xinghe International Trading Company were two of its top customers in 2007. The two companies were supposed to be sales agents for Takasima. All of the sales to the two agents were exports to Malaysia through Takasima for CSKI’s slim patch. In 2007 CSKI recorded about $12.2 million in sales to these companies. In 2008 those sales totaled about $7.5 million. The sales were false, according to the complaint, resulting in an overstatement of net income in 2007 by about 33.1% and 8.9% for 2008.

In December 2011, CSKI’s CFO resigned. Mr. Liu, who has been on sick leave since December 2011, continues as CEO. Following the resignation of 26 mid-level managers in March 2012, NASDAQ halted trading in the stock of the company. The firm also failed to file its annual report on Form 10-K for the year ended December 31, 2011 and its Forms 10-Q for the subsequent two quarters.

The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation. See also Lit. Rel. No. 22470 (Sept. 4, 2012). A related proceeding was filed against the company under Exchange Act Section 12(j). In the Matter of China Sky One Medical, Inc., Adm. Proc. File No. 3-15005 (Sept. 4, 2012).

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