by T. GormanPosted on Posted in SECActions

Offering fraud actions are a key part of the Commission’s focus on the main street investor. In many instances it is the small retail investor – including those using retirement funds – that are fleeced by the charlatans selling shares that sound good but are not. This is particularly true now as the virus driven pandemic continues to unfold and many lost their job as the soring employment report this week more than illustrates. Three cases of this type, announced by the Enforcement Division this week, that fall in this group are discussed below.

SEC v. Findley, Civil Action No. 3:20 – cv- 00397 (D. Conn. Filed March 25, 2020) is an action which names as defendants Bernard Findley and Halitron, Inc. Mr. Findley is the Chairman and CEO of Halitron, an issuer which claims to be an “equity holding company” but has no apparent business. Over a two year period Defendants engaged in a scheme that enabled them to raise funds from investors through the sale of debt.

In 2016 Halitron claimed to have about $300,000 in revenue. By the next year that amount decreased to zero. Nevertheless, Mr. Findley published over the period a series of press releases discussing an about to be completed audit of the firm, a stock repurchase program and other financial transactions. Each was false. Yet Defendants were able to induce investors to purchase debt in return for the opportunity to acquire discounted shares. The funds raised benefitted Mr. Findley, not the investors. The complaint, which is pending, alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 24781 (March 25, 2020).

SEC v. Lahr, Civil Action No. 5:20 (E.D. Pa. Filed March 24, 2020) is an action which names as defendants Todd Lahr and Thomas Megas. Defendant Lahr is an attorney licensed to practice in Pennsylvania. He was also a Commission registered investment adviser for several years and is the founder of THL Holdings, LLC and co-founder of Merran Global Holdings, Inc. both private Nevada firms. Defendant Megas, a British National resident in Switzerland, is the co-founder of Ferran.

In early 2012 Mr. Lahr began soliciting investors to purchase interests in THL Holdings. Those solicited are primarily clients from his law practice and friends. Potential investors were told that THL had indirect mining interests in Canada and New Guinea. Over a two-year period about $1.4 million was raise from 20 investors in THL Holdings. Those investor were assured that their funds would be invested in the company. Nevertheless, a large portion was misappropriated.

In 2015 Defendants began implementing a plan for the sale of Ferran shares. Part of the plan was to use portions of the offering proceeds to repay some of the THL Holdings investors. About $140,000 was raised from four investors, one of which had purchased shares in THL Holdings. The investors were assured their funds would be utilized in connection the same foreign mining interest discussed with the THL Holdings share purchasers. Again, portions of the offering proceeds were misappropriated. The complaint, which is pending, alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b). See also Lit. Rel. No. 24778 (March 24, 2020).

SEC v. Tarver, Civil Action No. 5:20-cv-00056 (N.D. Tx. Filed March 10, 2020). Named as defendants in the action are Joe Leland Tarver, Rock and Roll Cycles, LLC and Cycle for Life, Inc. Mr. Tarver is the managing member of each entity. Over a three year period, beginning in July 2014, Mr. Tarver raised just under $500,000 from 18 investors who purchased promissory notes from one of the entity defendants. Those notes carried interest rates that ranged from 6% to 9%. Investors were told that the funds would be used to manufacture custom tricycles for disabled children and adults. Interest on the notes would be paid from the profits. When the promised interest was not paid, some investors filed suit. Nevertheless, the note sales continued. There were no profits to pay investors. The complaint, which is pending, alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 2477 (March 23, 2020).

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by T. GormanPosted on Posted in SECActions

Stanley Sporkin passed away yesterday, March 23, 2020. A retired federal district court judge, he also served as the General Counsel to the CIA and as the Director of the Division of Enforcement at the Securities and Exchange Commission, perhaps the position for which he was known best.

The retired judge, who began at the Commission prior to the creation of the Division of Enforcement, eventually built it into what was widely regarded as the best enforcement program in the federal government. Early in his career the future director worked under Irving Pollack in the Division of Trading and Markets. In 1972 when the Enforcement Division was created, he became its first Deputy Director, serving under Irv Pollack who became Division Director.

In 1974 when Irv Pollack was appointed to the Commission, Stanley Sporkin became the Director of the Division. Under his direction the Division focused largely on corporate governance questions. Despite the fact that the agency had limited remedies that could be used for to resolve enforcement cases, Director Sporkin sparked an imaginative touch in those who worked under him. That resulted settlements some called creative — calling for the appointment of independent directors and the creation of an audit committee both of which were largely unheard of — but others decried as beyond the scope of the statutes.

It was watching television in the evening, however, that lead to the series of cases the Director is best known for – foreign corruption actions. During the TV coverage of the Watergate hearings there was testimony about corporate slush funds used for political contributions and bribes. Director Sporkin, an accountant and attorney, wondered how a public company would record a slush fund on its books given its disclosure obligations under the federal securities laws. A quick investigation – one man, no subpoena, lasting a few days – brought the answer: The money was moved off-shore, run through foreign entities, and back to the Chairman’s personal safe. No disclosure.

So began the series of questionable payments cases that spawned the Foreign Corrupt Practices Act, passed into law by Congress in 1977. Along the way Director Sporkin and his lieutenants investigated and brought a series of cases. Yet the Director and other senior staff members such as Alan Levenson, the Director of the Division of Corporation Finance, and Sandy Burton, the Chief Accountant, realized that the Enforcement Division did not have the resources to investigate even a fraction of the companies suspected of such conduct.

The result was the creation of what became the largest cooperation program in the history of the SEC – The Volunteer Program. It called for companies to conduct what is now called an internal investigation—something largely unheard of at the time — assess what violations of law occurred and who was involved, and prepare a report for Director Sporkin.

Following the program announcement, about 450 major companies headed the call, conducted investigations and filed reports with the SEC regarding their conduct. Settlements were reached and the cases resolved. While Director Sporkin was beloved as fair and loyal by those who worked for him, corporate America had a different, and less favorable view. Yet when called, the firms volunteered. Later, when asked how he had convinced the firms to cooperate since there was no promise of any kind made to induce them to enter the program, the Director stated “They trusted me.”

Years later, while serving as a federal judge, that same approach resulted in the resolution of a little known but significant case, Princz v. Germany. Hugo Princz, the U.S. born son of two immigrants, was trapped in Europe as Hitler’s army invaded. The family was caught, separated, and sent to concentration camps. At the end of the War only Hugo survived.

Later Hugo brought suit for reparations after learning the 1991 U.S. – Germany peace treaty excluded any fund or payments for Holocaust victims such as those available in other countries. The case was assigned to the Judge Sporkin. After Germany was dismissed based on sovereign immunity, the Judge permitted the case to continue by adding the four largest German firms to be added as defendants – each had used slave labor during the war. The suit persisted as the Judge talked repeatedly with defense counsel. The result was a resolution which created the only fund dedicated to compensating those who were U.S. citizens at the time they were interned in the camps. As the Judge later stated in defining his approach: “I always try to look at how to create something for the overall good. . .”

We will miss you Stan.

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