CAPITAL FORMATION – THE WRONG WAY

The CEO and President of Magnum d’Or Resources, Inc., Joseph Glusic, had a plan to bolster the cash of the company through stock sales. Magnum is a Fort Lauderdale, Florida based company which converts scrap tires into rubber compounds. Under the plan t stock would be registered with the SEC, sold into the market and the proceeds plowed back into the company. Basic capital formation.

Not quite. A few shortcuts were taken on the way. A Form S-8 registration statement was used. That Form permits the company to register shares for sale to company employees and consultants under certain circumstances. Specifically, services have to be performed. Those services cannot be in connection with capital-raising transactions or to promote the stock. If the shares are not issued for permissible services, they are not unregistered.

The company registered shares on an Form S-8. It represented that shares would be issued to consultants who rendered services to the company.

By July 2008 shares were being issued to Shannon Allen, Dwight Flatt and David Sciucca. Each is an unemployed consultant. Each had a brokerage account at Gibraltar Global Securities in the Bahamas. Each deposited most of the shares in their respective brokerage accounts. Typically those shares were sold into the market within 30 days. The proceeds were then either wired directly from the brokerage account or a personal bank account to the company. Promissory notes were then executed by each individual reflecting a loan of the proceeds to Magnum.

During the time period the stock was being sold the company issued press releases about its operations. For example, one noted that the company had more than $130 million in contracts for its products. Another claimed the company had secured $15 million in financing which would be used to expand the company. A third touted a plan to acquire a tire land fill. Trading volume for the shares of the company surged.

The plan did produce cash for the company through the sale of stock. However, the only services performed by Messrs. Allen, Flatt and Sciucca were selling the shares, forwarding the money to the company and signing the promissory notes. The representations in the S-8 were false. The shares were unregistered.

The press releases were also false. The order contracts did not require any minimum purchase and actually resulted in few sales and little revenue. The financing was continually delayed and never closed. The tire company that owned the land filed for Chapter 11 and the deal did not close.

The Commission however filed an enforcement action naming as defendants the company and Messrs. Glusic, Allen, Flatt and Sciucca. SEC v. Magnum D’Or Resources, Inc., Case No. 0:11-cv-60920 (S.D. Fla. Filed April 29, 2011). The complaint alleges violations of Securities Act Sections 5and 17(a) and Exchange Act Section 10(b) as to the company and Mr. Glusic and Section 5 as to the other individual defendants.

The company and Mr. Glusic settled with the SEC, consenting to the entry of permanent injunctions based on each Section cited in the complaint. Mr. Glusic also agreed to pay disgorgement of $1,878 along with prejudgment interest and a $50,000 civil penalty. In addition he agreed to the entry of an officer and director bar and a penny stock bar. Mr. Allen settled, consenting to the entry of a permanent injunction based on Securities Act Section 5. He also agreed to pay disgorgement of $80,742 along with prejudgment interest and a $25,000 civil penalty. In addition he agreed to the entry of a 5 year penny stock bar and to cancel about 1.4 million shares of Magnum stock. A separate administrative proceeding was initiated to determine if the registration of Magnum’s shares should be revoked. The other two defendants did not settle.

TWO MORE FCPA GUILTY PLEAS

DOJ continues to usher in a “new era” of FCPA enforcement as Assistant AG Lanny Breuer termed it in a recent speech, obtaining two more guilty pleas at the end of last week. Once evolved out of the on-going prosecutions relating to Control Components, Inc., a manufacturer of service control valves for use in nuclear, oil and gas, and power generation industries worldwide. The other stems from the so-called “shot-show” cases, the indictments stemming from the huge FCPA sting operation.

Flavio Ricotti, a citizen of Italy and the former vice president of sales for CCI pleaded guilty to a one count superseding information charging him with conspiring to make a corrupt payments to foreign government officials, and officials of private companies in several countries in violation of the FCPA. Mr. Ricotti was initially indicted along with five other former CCI executives in a sixteen count indictment in 2009. That indictment also charges Stuart Carson, CCI’s former president, his wife Hong Carson, the former director of sales for China and Taiwan, Paul Cosgrove, former director of worldwide sales, David Edmonds, former vice president of worldwide customer service and Han Yong Kim, former president of the Korean office for the company. The remaining defendants are scheduled to begin trial in October 2011.

Mr. Ricotti, arrested in Germany and extradited to the U.S., admitted conspiring with other CCI employees to offer a payment to an official of Saudi Aramco, a Saudi Arabian state-owned oil company in connection with efforts to obtain a valve contract. He also admitted conspiring with others in connection with making a payment to an employee of a private company so that the employee would assist in obtaining a valve contract in Quatar. During the bidding process Mr Rocitti learned that an employee of the private company would furnish confidential information about the bids of competitors and would exercise influence on behalf of the company to secure the contract. U.S. v. Rocotti (C.D. Ca.).

Previously, CCI and two other executives of the company pleaded guilty to FCPA charges. Mr. Ricotti is cooperating with the government.

In the shot-show cases Haim Geri pleaded guilty to a one count superseding indictment charging conspiracy to violate the FCPA. U.S. v. Geri, 09-cf-335 (D.D.C.). These cases stem from what has been called the largest FCPA sting operation in history.

In connection with his plea Mr. Geri admitted entering into an agreement to pay a 20% commission to a sales agent he understood to be a representative of Gabon’s minister of defense. The bribe was intended to obtain a portion of a $15 million contract to outfit the presidential guard. In reality the agent was an undercover FBI agent. Under the sentencing guideline calculation in the plea agreement Mr. Geri would be sentenced to 18 –24 months. The calculation is not binding on the court.

Mr. Geri is the fourth person to plead guilty in this case. Previously Richard Bistrong pleaded guilty to conspiracy to violate the FCPA and other statutes, Daniel Alviri pleaded guilty to two counts of conspiracy to violate the FCPA and Jonathan Spiller pleaded guilty to one count of conspiracy to violate the FCPA.