by T. GormanPosted on Posted in SECActions

Have we seen this movie before? On Friday China agreed to permit the PCAOB to conduct SOX inspections of work papers for China based issuers. This means the parties hope that promise of SOX made over two decades ago will finally be realized. The agreement was reached in the wake of threat to delist China based issuers, a result no party wants. Perhaps; we will all hope this time the promise is fulfilled.

Be careful, be safe this week

SEC

Whistleblowers: The Commission made two changes to the program. Under one it expanded the circumstances for which an award can be made. Under the second the Commission can consider the size of the award in making it but can only increase the size, not diminish it. The announcement was made on August 26, 2022.

Compensation: The agency adopted pay vs. performance disclosure rules first proposed in 2015, according to a release dated August 25, 2022 (here). The amendments require registrants to provide a table disclosing specific executive compensation and financial performance measures for their five most recently completed fiscal years (here).

SEC Enforcement – Litigated Actions

Microcap fraud: SEC v. Spartan Securities Group, Ltd. Civil Action No. 8:19-cvv-00448 (M.D. Fla.) is a previously filed action which named as defendants Spartan Securities Group, a transfer agent, Island Capital Management LLC and two of its principals, Carl E. Dilley and Mich Eldred. Following a three-week trial, a jury returned verdicts against each Defendant for violating Exchange Act Section 10(b). Defendants were found to have made false representations to permit unregistered securities to trade in the public markets. Those statements included false representations that the shares were free trading which permitted the legends to be removed. The actions were part of a shell creation scheme involving 19 firms. The Court ordered permanent injunctive relief against Island Stock Transfer and five-year injunctions against Defendants Dilley and Eldred. A a penny stock bar was also imposed on Spartan while a 10 year penny stock bar was ordered as to Defendants Dilley and Eldred, In addition, a $250,000 penalty and $150,000 penalty as to, respectively, Spartan and Island. Capitol was ordered. That firm was also directed to pay disgorgement and prejudgment interest in the amount of $154,394.05. See Lit. Rel. No. 25486 (August 26, 20220.

Fraudulent fees: SEC v, Cooke, Civil Action No. 1:17-cv-02873 (N.D.Ga) is a previously filed action against broker Jonathan Dax Cooke. Defendant convinced hundreds of current and former federal employees to liquidate their Thrift Savings Plan and purchase variable annuities from him. Those annuities charged significantly higher fees to purchase, giving Defendant substantial commissions. After trial the court ruled against Defendant. A final judgment has been entered precluding future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and from aiding and abetting violations of the broker-dealer books and records requirements. Defendant was also ordered to pay disgorgement of $396,409 and a civil penalty of $103,591. See Lit. Rel. No. 25479 (August 19, 2022).

SEC Enforcement – Filed and settled actions

Last week the Commission filed 7 civil injunctive actions and 3 administrative actions, exclusive of 12j, default, tag-a-long and other similar proceedings.

Financial fraud: SEC v. Granite Construction, Inc., Civil Action No. 5:22-cv-0457 (N.D. Ca. Filed August 25, 2022) is an action which names as defendant the company, an infrastructure-construction firm based in Watsonville, California. Over a period of about 2 years, beginning in 2017 Dale Swanberg, group leader and senior vice president for the firm’s largest civil engineering projects, orchestrated a scheme to improperly defer the recording of additional costs that arose with significant projects to conceal the deteriorating revenue of the group. Specifically, the firm’s policies and procedures and internal accounting controls required the construction teams within the Heavy Civil Group to create a forecast for each project that accurately forecasted the total cost. The forecast was put into the general ledger that calculates revenues and the profit margin for the group. Mr. Swanberg’s scheme manipulated profit margins and deferred the recognition of expected cost increases. Thus, the firm overstated revenue by $62 million over several quarters of 2018 and 2019. Following disclosure of the scheme the stock price crashed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm settled the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, the firm agreed to pay a civil penalty of $12 million. See also SEC v. Swanberg, Civil Action No. 5:22-cv-00459 (N.D.Ca. Filed August 25, 2022 (same as above except does not include Exchange Act Section 13(b)(2)(B); case is pending); In the Matter of Jigisha Desa, Adm. Proc. File No. 3-21005 (August 25, 2022)(CFO of firm; based on facts above; alleged to have caused violations of SOX 304(a); resolved with a cease-and-desist order based on Section cited; Respondent reimbursed the firm over $176,000 in bonuses and cash equivalent for them); In the Matter of Laurel Krzeminski, Adm. Proc. File No. 3-21004 (August 25, 2022)(CFO of firm; based on facts above; resolved same as prior action above); In the Matter of James H. Roberts, Adm. Proc. File No, 3-21003 (August 25, 2022)(CEO of firm; based on facts detailed above; resolved with the entry of a cease-and-desist order as above; in addition, Respondent was ordered to reimburse the firm $629,000 per SOX 304(a); Respondent will also return 27,527 shares of stock).

Offering fraud: SEC v. Rege, Civil Action No. 21-cv-19313 (D.N.J) is a previously filed action that named as defendants Swapnil Rege and SwapStar Capital, LLC. The complaint alleged that Defendants solicited friends, neighbors and others to be investment advisory clients. Potential clients were guaranteed profitable returns. Investor funds were used, however, to pay others profits or return capital and in part misappropriated. Last week the Court entered a final judgment, permanently enjoining Defendants from future violations of Advisers Act Sections 206(1) and 206(2) and directed the payment of disgorgement in the amount of $207, 183 on a joint and several basis. A penalty of $207, 183 was also ordered. Defendant Rege was, in addition, enjoined from further violations of a 2019 order entered against him which barred association with an investment adviser. See Lit. Rel. No. 25482 (August 25, 2022).

Fraudulent sales: SEC v. Arkells, Civil Action NO. 2:22-cv-5991 (C.D. Cal. Filed August 24, 2022) is an action which names as defendant Nicolas Arkells, the former Chief of Strategy and Business Development of C3 International, Inc., a purposed medical cannabis firm. This action centered on the sale of shares to investors in a marijuana firm. The sales were made based on misrepresentations. The Commission previously filed a suit against the company and others claiming that at least 40 investors had been defrauded. Defendant is not a registered broker-dealer. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 25481 (August 24, 2022).

Offering fraud: SEC v. Taronis Technologies, Inc., Civil Action No. 8:22-cv-01939 (M.D. Fla. Filed August 24, 2022) is an action which names as defendants: the firm; Taronis Fuels, Inc., David Mahoney, CEO of Taronis Tech; and Tyler Wilson, an attorney and Director of Taronis Tech. Over a period of about one year, beginning in January 2019, Taronis Tech, and over a period of several months, beginning in February 2020l, Taronis Fuels, and the CEO of both firms, Scott Mahoney, defrauded investors of both firms by making false statements. Taronis Fuels also falsified its quarterly financial statements for the second and third quarters of 2020. From about April 2020 to November 2020, Defendant Dan Mahoney and Tronis Fuels’ former general counsel and CFO, Tyler Wilson, falsified the financial records by creating fake orders. Later the same year $30 million was raised from investors by Taronis Fuels through the use of the false financial statements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13b(2)(B) , 13b-5 and 20(a). Defendant Taronis Fuels resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. The firm also agreed to pay disgorgement in the amount of $4,867,023 and prejudgment interest of $231,877.50. Defendant Mahoney consented to a bifurcated settlement under which he is enjoined from future violations of the Sections cited in the complaint, will pay a penalty of $150,000 and be barred for five years from serving as a director and officer of a public company and participating in a penny stock offering. The Court will determine if he should pay disgorgement and prejudgment interest and reimburse Taronis Fuels under SOX Section 304(a). See Lit. Rel. No. 25484 (August 25, 2022).

Offering fraud: SEC v. Wilson, Civil Action No. 4:22-cv-00741 (N.D. Tx. Filed August 23, 2022) is an action which names as defendants John Wilson II and Aether Innovative Technology, Inc. Defendant Wilson is the CEO of the company. Over a period of about one year, beginning in August 2019, Defendants defrauded 15 investors out of $1.9 million. Representations regarding the amount invested by Defendant Wilson in the business, the development of hardware at the firm, and the existence of customer relationships were all false. Defendant Wilson also misappropriated about $122, 850 of investor funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25483 (August 25, 2022).

Offering fraud: SEC v. Watson, Civil Action No. 220-cv-02147 (D. Colo. Filed August 22, 2022) is an action which names as defendants Robert Watson and WDC Holdings LLC. The latter is a real estate firm; the former is its founder. Over a two-year period, beginning in April 2017, Defendants raised about $49.5 million from at least 350 investors. Those investors were told that from 4 to 5% of the money invested in the real estate firm would come from Defendants. Having ”skin in the game” was important to investors because it created an incentive for Defendants to maximize profits. Defendants’ claims were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25480 (August 23, 2022).

Sham tender offer: SEC v. Simmons, Civil Action No. 1:22-cv-07081 (S.D.N.Y. Filed August 19, 2022) is an action which names Lee Simmons as defendant. Mr. Simmons claims to have positions with several firms. Beginning in November 2019, and continuing over he next four months, Mr. Simmons made false and misleading statements to the Commission and others as part of multiple attempts to manipulate the price of BlueLinx common stock and benefit from his purchase of its shares. Specifically, in early February Mr. Simmons purchase more than 900 out of the money BlueLinx call options with a strike price dramatically exceeding the price of common shares. Subsequently, he issued press releases claiming that Bluefin Acquisition, LLC, a firm formed 3 months earlier by Defendant, commenced a tender offer for 35% of the shares at a price over the recent market price. The acquisition would have cost about $80 million, After failing to sell his options on one day, the next Mr. Simmons did succeed in sell a portion of the position, raising $24, 000. The tender offer was a sham. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 14(e) and Advisers Act Section 207. The case is pending. See Lit. Rel. No, 25478 (August 19, 2022).

Singapore

Paper: The Monetary Authority of Singapore published a paper on strengthening AML/CFT practices for external asset managers on August 24, 2022 (here).

by T. GormanPosted on Posted in SECActions

This is the second part of a four part series tracing and analyzing trends in Commission enforcement actions filed during the second quarter of 2022. Part I, published on Tuesday, August 23, 2022 (here), noted that 101 enforcement were filed during the quarter five key areas of focus during the quarter. There were five areas of concentration: Offering fraud, transfer agents, manipulation and insider trading.

This segment of the series furnishes examples of the cases in the five areas of concentration. The third segment of this series will be published on Wednesday, August 31, 2020. It focuses on significant actions filed during the period that are not in one of the five areas that represent the largest concentration of cases. Part IV will be published on Thursday, September 1, 2022. It is the conclusion to the series.

Key Cases in Each Major Category

The cases discussed below under each caption are representative of those in each of the five groups which represent the largest concentrations of cases during the second quarter.

A. Offering fraud

Two cases below are typical of those in this group. The first centers on the claimed sale of cannabis products and cape pens that were oil infused. The second keys on the solicitation of residents in a retirement homes. The investors lost substantial sums in each case.

SEC v. Bunevacz, Civil Action No. 2:22-cv-02284 (C.D. CA. Filed April 5, 2022) names as defendants: David Bunevacz, who controls Caesarbrfutus LLC and CB Holdings and he pleaded guilty to two felony securities charges based on California law in 2017; Mary Hayca Bunevacz is the step daughter of Mr. Bunevacz; Caesarbrutus and CB Holding Group Corp. are firms controlled by Mr. Bunevacz; and Brutus California Ventures Corp. is controlled by Ms. Bunevacz and is co-issuer with CB Holdings. Over a two-year period, beginning in 2017, Defendant Bunevacz and the two entities he controls, raised over $32 million from at least 40 investors. Solicited investors were told that Mr. Buevacz was selling cannabis products and vape pens containing oil infused with Cannabidiol. The profits from the sale of these products were to be shared with Casearbrutus and CB Holdings. In making the solicitations Mr. Bunevacz did not disclose his criminal convictions. Brutus California was a co-issuer with CB Holdings. Both Ms. Hayca and that firm participated in the solicitations. In fact, the offerings were of unregistered securities and the entity Defendants had no actual business – the transactions were shams and the money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25356 (April 5, 2022).

SEC v. Minuskin, Civil Action No. 22CV0483 (S.D. Cal. Filed April 8, 2022) is an action which names as defendants: Julie Minuskin, CEO of Retire Happy LLC; Dennis Diricco, CFO of Golden Genesis; Thomas Casey, CEO of Golden Genesis, Inc. and a Defendant in a prior Commission enforcement action he settled; Golden Genesis, Inc., ostensibly a business involving plasma; and Joshua Stroll, employed at Retire Happy. Over a seven-year period, beginning in early 2012, Defendants DiRicco and Casey raised about $15 million from about 300 investors, all of whom were clients of Retire Happy. That company to provide investors with financial education and strategies on how to leverage retirement accounts. In fact, the company did not have sufficient funds to make the kind of payments promised. Likewise, the UCC-1 Financing Statement that was promised on all of Golden Genesis’ assets was never filed. In fact, before recommending Golden Genesis as an investments to its clients there was no due diligence and the officers of the firm failed to disclose their conflicts. The complaint alleges violations of Securities Act Section 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending as to all Defendants except Mr. DiRicco who consented to the entry of a permanent inunction based on Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and also a from participating in any penny stock offering. See Lit. Rel. No. 25359 (April 11, 2022).

B. Transfer Agents

Each of the cases in this group centers on the failure to comply with the obligations of a transfer agent by maintaining record or completing required forms.

On June 30, 2022 the Commission instituted proceedings against seven transfers agents. The Orders allege that the agents failed to permit examination by the Commission staff of their books and records, that five failed to furnish statutorily required records, that four had deficient registration forms and that all failed to amend their registration forms when the information became inaccurate. The firms also failed to file at least one annual report. Each of the seven firms are also alleged to have violated the prohibition against transfer agents engaging in any activity as a transfer agent in violation of certain rules and regulations. The Orders alleged violations of Exchange Act Sections 17(b)(1), 17A(c)(2), 17A(d)(1) and the related rules. A public hearing will be held. See, e.g. In the Matter of The Brandon Rawls Trust, Adm. Proc. File No. 3-20915 (June 30, 2022). (filing inaccurate Form TA -1 when registering as a transfer agent).

C. Manipulation

The first case below centers on the manipulation of a firm’s share price by falsely announcing that Berkshire Hathaway had taken an interest in the company. The second involves a complex fact pattern involving the manipulation of security based swaps and other instruments held by Archegos.

SEC v. Passos, Civil Action No. 1:22-cv-03156 (S.D.N.Y. Filed April 18, 2022) is an action which names as defendant Fernando Passos, the executive vice president of finance and investor relations for Brazilian reinsurance company IRB Brazil Resseguros S.A. In February 2020 IRB’s stock price dropped following a letter by a short seller questioning the firm’s financial results. Defendant then planted a false news story claiming that Berkshire Hathaway Inc. had invested in the firm. Subsequently, in late February and early March the IRB stock price increased about 6%. After Berkshire denied the story the share price dropped about 40%. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25370 (April 18, 2022).

SEC v. Hwang, Civil Action No. 1:22-cv-03402 (S.D.N.Y. Filed April 27, 2022). The cases are based on the manipulation of ten different stocks held by Archegos and a series of lies about the financial condition of the fund which permitted it to completely overextend its credit – the firm collapsed. Those named as defendants are: Sung Kook Hwang, the founder and manager of Archegos who was responsible for all investment decisions; Patrick Halligan, the CFO of the firm; William Tomita, the head trader of Archegos; Scott Becker, the chief risk officer of Archegos; and the firm. Over a period of about one year, beginning in March 2020, at Mr. Hwang’s direction the firm rapidly grew, primarily through the use of security-based swaps with about a dozen counterparties. Those arrangements put the firm at risk from volatile prices. To sustain its growth trajectory, the firm chose not to rely on just market prices. Rather, it began manipulating the securities of its top ten holdings. This was done through purchases of issuer securities and entry into security-based swaps referencing those issuers. In effect, Archegos dominated the securities of those issuers through trading and by marking the close for those stocks – trading at the end of the day to set the closing price. A key part of the scheme involved maintaining the margin with Archegos’ counterparties. To achieve this the family office could not share its actual financial results with its counterparties as it pushed and strained the credit arrangements. To continue extending the lending arrangements Defendants Hwang, Halligan, Tomita and Becker misled the counterparties. False information regarding the composition of the firm’s portfolio was furnished as well as about its concentration and liquidity. Eventually, Defendants could not maintain the fraud. As the security prices began to fall in March 2021 the fraud unraveled and Archegos spiraled to collapse. Billions of dollars in losses resulted. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges. The CFTC also filed a civil action.

D. Financial Fraud

Financial fraud is a key staple of SEC Enforcement. In the examples here a firm manipulates certain metrics in an effort to sustain a long streak of continually increasing its quarterly results while the second action centers on creating two sham transactions.

Corporate/financial: In the Matter of Rollins, Inc., Adm. Proc. File No. 3-20824 (April 18, 2022). Respondents are Rollins and its CFO, Paul Northen. The Atlanta based firm provides termite and other pest control services to residential and commercial companies through brands such as Orkin. Its shares are traded on the NYSE. Mr. Northen served as CFO for seven years beginning in 2015. Rollins fostered the development of a culture focused in part on earnings consistency. In the first quarter of 2016 the quarterly report filed with the Commission announced that the firm was posting its “40th consecutive quarter of improved revenues and earnings. . .” The earnings release for the second quarter of 2017 announced the “45th consecutive quarter of improved earnings and revenue.” Each quarter the company made a determination as to the appropriate amount to reserve or accrue for several categories of lability accounts. Those included reserves for items such as a termite reserve which is an estimate of actual or potential damage claims by customers. The firm also had certain corporate-level reserve accounts. Those were determined after the results for reporting units were available. The CFO had the final determinative authority over the amount of the corporate-level reserves. In the second quarter of 2017 CFO Northen directed a reduction to certain corporate-level accounting reserves. The purpose was to enable the company to publicly report earnings per share in line with research analysts’ consensus estimates. Mr. Northen was aware at the time that the company earnings were close to but not at consensus estimates when directing that the adjustments be made. Without the adjustments for the first quarter of 2016 and the second quarter of 2017 the company would have been below the consensus by one cent. At the time of the reserve adjustments Rollins’ accounting personnel had significant discretion. The company failed to devise and maintain sufficient internal accounting controls. The Order alleges violations of Securities Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and 13(b)(5). The Commission considered the cooperation and remedial acts taken by Rollins. To resolve the proceedings the company consented to the entry of a cease-and-desist order based on each of the Sections cited in the Order except Exchange Act Section 13(b)(5). The firm will pay a civil penalty of $8 million. In addition, Mr. Northen resolved the proceedings as to him, consenting to the entry of a cease-and-desist order based on each of the Sections cited in the Order. He agreed to pay a civil penalty in the amount of $100,000.

SEC v. United Health Products, Inc., Civil Action No. 1:11-cv-03612 (D.N.Y. Filed June 8, 2022) is an action which names the firm, a manufacturer of certain medical products and two of its officers – Douglan Beplate, Chief Executive Officer — and Louis Schiliro, COO – as defendants. Defendants orchestrated two sham transactions to artificially inflate revenue. The first involved the purported sale of product to a customer using a back-dated purchase which the customer canceled. No product was shipped; no payment received. The transaction was booked. The second involved recognizing revenue from a sale to the firm’s largest customer when in fact there was no legitimate sale. To conceal the transactions the two officers of the company repeatedly gave the outside auditors false explanations. As a result, the Forms 10Q and 10-K doe 12017 and 2018 were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(A), 13(b)(5) and 16(a) along with Section 304(a) of SOX. The case is pending. See Lit. Rel. No. 25413 (June 8, 2022).

E. Insider trading

Insider trading is one of the key staples of enforcement. Below are two examples of classic insider trading cases.

SEC v. Sure, Civil Action No. 3:22-cv-01967 (N.D. Cal. Filed March 28, 2022). The action centers on trading in advance of the first quarter 2020 earnings release, published on May 6, 2020 of Twilio, Inc. The firm is a San Francisco based cloud computing communications company. Three of the defendants were employed at Twilio: Hari Sure, Lokesh Lagudu and Chotu Pulagam. Each was employed as a software engineer. Others named as defendants in the action are: Dileep Kamujula, Sai Nekkalapudi, Abhishek Dharmapurikar and Chetan Pulagam. Between late March and early May the employee Defendants each obtained inside information regarding the firm’s revenue for the period by accessing Twilio data bases. Each either tipped friends or traded for their personal account as follows: 1) Defendant Sure tipped Kamujula, a close friend; 2) Defendant Laguda tipped Nekkalapudi, his girlfriend: 3) Defendant Laguda also tipped Dhrmapurika, a former roommate; 4) Defendant Chotu Pulagam tipped Chetan Pulagam, his brother; 5) Defendant Kekkalapudi traded for his account; and 7) Defendant Dharmapurikar traded for his own account. Essentially each tippe traded while the tipper did not; each Defendant who did not tip anyone traded profitably. The trading ring netted over $1 million in illicit profits from trading Twilio securities prior to the announcement. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Norther District of California announced criminal charges against Dileep Kamujula. See Lit. Rel. No. 25350 (March 29, 2022).

SEC v. Sheinfeld, Civil Action No. 1:20-cv-01692 (M.D. Pa.) is a previously filed action which named as defendant, Steven J. Sheinfeld, formerly employed by Rite Aid Corp. That and Walgreens Boots Alliance, Inc. at one point had discussions centered on a possible merger. When it was determined that it would not proceed, but prior to the time that information became public, Mr. Sheinfeld, who learned of the confidential determination, liquidated nearly $1 million if Rite Aid securities. Mr. Sheinfeld settled charged that he violated Exchange Act Section 10(b) by consenting to the entry of a final judgement precluding future violations of the Section cited. Last week the Court entered judgment by consent. The order also directed Mr. Sheinfeld to pay a penalty of $305,129. See Lit. Rel. No. 25428 (June 21, 2022).

Next: Part III of the series — Other significant cases filed during the quarter; to be published Wednesday, August 31, 2022

Tagged with: , , ,