The Commission filed a series of actions this week. Those included a microcap fraud case in which nineteen sham entities were created using a series of misrepresentations; an insider trading action in which a an executive began placing orders with his broker to sell firm ADRs the same day he learned his employer would have to withdraw two drug trials considered to represent the future of the firm; and FCPA action in which the company repeatedly paid bribes in India to further various construction projects; and a case centered on an ICO in which the Commission claimed the Howey test was met because the offering proceeds would be used to help create a trading market place for the coins that ultimately would increase liquidity and thus value.
SEC
Proposed rules: The Commission proposed to expand “test-the-waters” reforms to all issuers (here).
SEC Enforcement – Filed and Settled Actions
The Commission filed 4 civil injunctive action and 2 administrative proceeding this week, exclusive of 12j and tag-along actions.
Microcap sham shells: SEC v. Spartan Securities Group, LTD., Civil Action No. 19-civ-00448 (M.D. Fla. Feb. 20, 2019) is an action which names as defendants: Spartan, a registered broker-dealer; Island Capital Management LLC, a registered transfer agent; and Carl Dilley, Micah Eldred and David Lopez who collectively control the two entity defendants. The action centers on a five-year long shell creation scheme that began in 2009. The Mirman/Rose Companies (Alvin Mirman and Sheldon Rose) were responsible for creating 14 shells corporations that were shams while the Daniels Companies (Michael Daniels, Andy Fan and Diane Harrison) created another five. The creation of the shell companies, coupled with claims that the shares were free trading, hinged on a series of misrepresentations. Those included false statements to FINRA on Form 211 applications, to DTC and to potential buyers. As a result, the complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act Sections 10(b) and 15(c)(2). See Lit. Rel. No. 24405 (Feb. 21, 2019).
Insider trading: SEC v. Vacante, Civil Action No. 19-cv-1616 (S.D.N.Y. Filed Sept. 21, 2019) is an action which names as a defendant Joseph Vacante, the North American General Manager for Trinity Biotech plc, an Ireland based pharmaceutical firm. On September 29, 2016 at 11:40 a.m. Defendant’s superior called and informed him that the FDA told the company to withdraw its drug trial applications for two products that Mr. Vacante believed were the future of the firm. Less than one hour later Mr. Vacante called his Morgan Stanley broker to reduce the limit price on his shares. At 1:48 p.m. the same day he called the broker and told him to drop the limit order and sell all of the firm ADRs in his account. When the company announced the withdrawal of the applications for the two drugs on October 4, 2017 the share price tumbled about 50%. Mr. Vacante avoided losses of 50% or over $70,000. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the matter Defendant consented to the entry of permanent injunctions based on the sections cited in the complaint. In addition, he agreed to pay disgorgement of $70,827, prejudgment interest of $6,247 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24406 (Feb. 21, 2019).
Financial fraud: SEC v. Sandoval, Civil Action No. 1:17-cv-20301 (S.D. Fla.) is an action which named as defendants Mathias Francisco Sandoval Herrera and Maria D. Cidre, respectively, the CEO and former CFO of the Rest of World operating segment of General Cable Corp. The complaint claimed that in 2017 Defendants learned of an inventory overstatement and related accounting errors which continued to increase and which were substantial. Rather than disclose the facts discovered, the two executives concealed them. The complaint alleged violations of Securities Act Section 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the matter Defendant Sandoval consented to the entry of a permanent injunction based on each of the Exchange Act provisions cited and to pay a penalty of $150,000. Ms. Cidre consented to the entry of a permanent injunction based on the Securities Act Section cited in the complaint and to the payment of a $40,000 penalty. The Commission also informed the court that it would not seek a penalty or an officer and director bar against Antonio Miranda Gonzalez who previously settled based on cooperation. See Lit. Rel. No. 24407 (Feb. 21, 2019).
Crypto currency: In the Matter of Gladius Network LLC, Adm. Proc. File No. 3-19004 (Feb. 20, 2019) is an action which names as a Respondent the firm which is based in Washington, D.C. Beginning in mid-2017 the firm began to develop a network for coins it called GLA Tokens which were to be issued on a blockchain. The tokens were designed to serve as a currency for the provision of services within the Gladius network. That network would permit participants to rent spare bandwidth and storage space on their computers and servers to defend against certain types of cyber-attacks. An offering conducted through the use of a white paper raised about $12.7 million worth of Ether. The purpose of the offering was to raise the capital necessary to enhance the liquidity of the coins. Those coins would become more liquid through the efforts of others as the network developed. Increased liquidity should in turn result in more value or profits for coin holders. Accordingly the coins are securities under Howey, according to the Order. Respondent self-reported in 2018 in an effort to assure compliance. The Order alleges violations of Section 5(a) of the Securities Act. Respondent entered into certain undertakings which include notifying purchasers about this action and registering the coins for trading under the Exchange Act. Coin purchasers will also receive a refund and certain reports will be filed with the staff. Respondent consented to the entry of a cease and desist order based on the section cited in the Order.
FCPA/Anti-Corruption
In the Matter of Cognizant Technology Solutions Corporation, Adm. Proc. File No. 3-19000 (Feb. 18, 2019). New Jersey based Cognizant, whose shares are listed on Nasdaq, is a global provider of information technology and business process services. Its largest subsidiary is located in India. Beginning as early as 2012, and continuing through at least early 2016, Cognizant, and Cognizant India, payed illegal bribes to certain officials and took steps to conceal that conduct until the firm finally informed the staff, according to the Commission’s Order.
First, beginning as early as 2011, and continuing for the next few years, the firm was engaged with planning and constructing a new campus in Chennai, India. The plan was to construct 2.7 million square feet with a capacity for over 17,000 employees. The firm used Contracting Firm-1 for the project. As the project moved forward in 2014, a firm officer learned that an Indian government official required that the contracting firm pay a $2 million bribe as a condition of issuing the planning permit. Ultimately the firm’s President, Gordon Coburn, and Chief Legal and Corporate Affairs Officer, Steven Schwartz, approved the payment of the bribe through Contracting Firm-1, according to the SEC’s allegations. The contractor, who initially balked at making the payment, would be given $500,000. A series of false invoices from the contractor were constructed to conceal the payments. False supporting excel spread sheets were created. The President approved the payments beginning in March 2015 and continuing through January 2016.
Second, the firm was constructing a commercial office facility in Pune, India. Work began in 2012, prior to the issuance of the necessary permits. Cognizant India authorized Contracting Firm-1 to pay an Indian official $770,000 in return for issuing an environmental clearance. The contracting firm sought and eventually obtained reimbursement through a change order request.
Third, additional construction was undertaken in Siruseri, India. There Cognizant India authorized Construction Firm-1 to pay bribes totaling about $840,000. The bribes were paid to secure a power permit from the local electricity board and an environmental clearance in 2012. Again the contractor was reimbursed eventually through change order requests. Finally, Cognizant India paid about $27,000 in bribes to government officials for the purpose of obtaining certain operating licenses at six Indian facilities. Those payments were made between 2013 and 2016, typically to lower and mid-level employees. The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 30A. In resolving the matter, the Commission considered the fact that the firm self-reported, undertook remediation and has agreed to continue to cooperate.
To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, the firm will pay disgorgement of $16,394,351, prejudgment interest of $2,773,017 and a penalty of $6 million. See Lit. Rel. No. 24402 (Feb. 15, 2019); see also SEC v. Coburn, Civil Action No. 2:19-cv-05820 (D.N.Y. Feb. 15, 2019); U.S. v. Coburn, No. 2:19-cr-00120 (D.N.J. Filed Feb. 15, 2019). The DOJ declined prosecution as to the company.
Hong Kong
Insider trading: Au-Yeung Siu Pang, former group finance manager of China CBM Group Company Limited was sentenced to serve four months in prison and fined $120,000 after being convicted of insider dealing in the shares of his employer. About Marcy 27, 2011 he learned during an audit that the firm had substantial undisclosed losses and that there was a danger the audit would not be completed in time to avoid having its shares suspended from trading. Shortly before the shares were in fact suspended, he sold about 600,000 shares and had his father sell another block of 500,000. Once trading was reinstated the price was down 20%. The sale of the two blocks avoided losses of over $170,000.
