by T. GormanPosted on Posted in SECActions

Last week a jury in the Central District of California found in favor of the Commission in a case centered on sham transactions used by corporate insiders to essentially misappropriate unregistered shares of the company. The shares were then sold into the market through others who funneled the cash back to the insiders.

This week a jury in the District of Connecticut found in favor of the Commission in a case were an investment adviser disregarded its fiduciary obligations and lined its pockets, and those of its controlling shareholder, at the expense of clients. SEC v. Westport Capital Markets, LLC, Civil Action No. 3:17-cv-02064 (C.D. Cal. Verdict March 16, 2020).

Named as defendants in the action are: Westport, a dually registered investment adviser and broker-dealer. During the period the advisory was paid fees for investment advice and the management of client accounts. Defendant Christopher McClure is the President CEO, CFO and COO of the advisory. He also personally advised certain clients and had authority to make investment decisions for select clients.

Defendants, according to the complaint, charged clients for undisclosed mark-ups on certain securities and 12(b)-1 fees on certain mutual fund shares without disclosing these facts to the advisory clients involved. First, beginning in 2011, and continuing for about four years, Westport acquired certain shares at a discount from a group of underwriters. Specifically, the advisory entered into an arrangement with the underwriters pursuant to which it was able to purchase shares in underwritten offerings at a discount. Those shares were then sold to certain advisory clients at full price. The mark-ups were not disclosed to the clients.

Over the period the advisory clients paid the firm $1.7 million in advisory fees. In addition, the advisory received about $650,000 in undisclosed mark-ups from Mr. McClure’s advisory clients who purchased shares held in the firm’s account that had been acquired from the syndicate at a discount. Mr. McClure was paid by the firm from the net profits.

Second, during approximately the same period certain advisory clients purchased mutual fund shares that carried 12b-1 fees. The fees were not disclosed to the clients despite the conflict of interest. The advisory received about $130,000 from those fees. The complaint alleged violations of Advisers Act Sections 206(1), 206(3), 206(3) and 206(7).

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by T. GormanPosted on Posted in SECActions

Last week a jury in the Central District of California found in favor of the Commission in a case that varied significantly from the all too familiar offering fraud actions the agency has focused on recently. In that case the fraudsters did not sell the shares to the unsuspecting public with tales of riches never to be realized. To the contrary, the Commission alleged that the fraudsters actually misappropriate the shares of stock from a company they controlled. What were essentially sham transactions were then used to sell the shares into the open market and route the money back to the COB and his CEO wife. The jury found the defendants liable for violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 10(b) and 20(a). SEC v. Curative Biosciences, Inc., Civil Action No. 18-cv-925 (C.D. Cal. Verdict March 11, 2020).

Curative Biosciences is a microcap issuer with a long and checkered past. The firm’s names included Recent Services, Time Lending, Time Associates, Healthieny, and others. Additional defendants in the action included William Alverson, a securities law recidivist who pleaded guilty in 2015 to criminal violations of Securities Act Section 5 who was sentenced to prison; Stephen Patton, the owner of Charlie Don’t Surf, Inc. and Surfside; and Katherine West Alverson. Mr. Alverson was the Chairman of the Board of Curative Biosciences. Ms. Alverson, the Chairman’s wife, was the CEO of the firm.

In the fall of 2013 Curative Biosciences filed a Form 10-K with the Commission which stated in part that the firm had previously registered and issued 20.5 million under an equity compensation plan on Form S-8. In fact, over 17 million shares were issued to Mr. Patton. He had performed negligible services for the shares. Most of the funds from the sale of the shares were sent to Mr. Patton’s firm, Northeast Capital. Much of the money ended up with Defendant Alverson.

The filings also claimed that Curative Biosciences could issue 19.1 million shares of common stock under Securities Act Section 3(a)(10) with the approval of a reviewing court to discharge $95,000 in claims against the company by a third party and non-party to a legal action filed against the firm. The third party was Mr. Patton’s Surfside. The shares issued had a value of about 18 times the amount of the debt. The shares were sold with most of the funds being routed back to Mr. Alverson.

Months before the Form 10-K filings, the Company, and its COB and CEO sold about 7 million shares of the stock supposedly under Securities Act Section 3(a)(10). The terms and conditions of the issuance that should have been disclosed to a reviewing court when seeking authorization for the issuance. There was no disclosure.

Overall about 33 million shares of Company stock was sold. Most of the proceeds were routed back through Mr. Patton and or his entities to the Chairman and his wife. The jury returned verdicts in favor of the Commission.

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