by T. GormanPosted on Posted in SECActions

The blistering pace at which the Commission filed new enforcement actions as the fiscal year end drew near has clearly ended. This week the agency filed one enforcement action while announcing the settlement of a previously filed case.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 1 civil injunctive case and no administrative proceedings, excluding 12j and tag-along proceedings.

Offering fraud: SEC v. Faulkner, Civil Action No. 3:16-cv-01735 (N.D. Tx. Filed June 24, 2016) is a previously filed action which named as defendants: Christopher Faulkner, known as the Frack Master from his TV and radio appearances, President and CEO of defendant Breitling Energy Corporation, registered under Section 12(b) with the SEC; Breitling Oil & Gas Corporation; Crude Energy, LLC and Patriot Energy, Inc., both controlled by Mr. Faulkner; Jeremy Wagers, a Texas Attorney; Judson Hoover, a CPA and Breitling Energy Corp. CFO; Parker Hallam, co-founded of Breitling and president of defendant Crude Energy; Joseph Simo, the owner of Simo Energy, LLC, a Dallas petroleum geology consulting firm that services Breitling Oil, Breitling Energy, Crude Energy and Patriot Energy; Dustin Miller Rodreguez, co-founder of Breitling Oil and its CIO; Beth Handkins, Crude Energy’s COO; and Gilbert Steedly, Breitling Energy’s v.p. of capital markets. Frack Master Faulkner created a fraudulent offering scheme using Breitling Oil which was later essentially replicated with other firms, including publically traded Breitling Energy. He began in 2011 with privately held Breitling Oil. The firm told investors it was offering “turnkey” oil and gas working interests. Mr. Faulkner ran the operations in large measure while Messrs. Hallam and Miller directed the sale process. The sales process was built on a series of misrepresentations about Mr. Faulkner’s background, the costs of developing the properties and ended with the misuse of investor funds. Investors were also furnished information from geologist Joseph Simo who was represented to be independent when he was not. By repeatedly replicating this scheme Defendants raised about $80 million in more than 20 oil and gas offerings from hundreds of investors. Mr. Faulkner misappropriated at least $30 million. The Commission’s complaint alleged violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) and 16(a). Mr. Faulkner settled with the Commission, consenting to the entry of permanent injunctions and agreeing to pay $23.8 million in disgorgement. He also agreed to the entry of a director and officer bar and a penny stock bar. Mr. Faulkner, in addition, settled with the U.S. Attorney’s office in the parallel criminal case based on charges of securities fraud, money laundering and tax evasion. He will serve 12 years in prison. U.S. v. Faulkner, No. 3:18-cr-00500 (N.D. Tx.).

Manipulation: SEC v. Fisher, Civil Action No. 9:18-cv-81428 (S.D. Fl. Filed Oct. 22, 2018) is an action which names as defendants Mark Fisher, an attorney whose license is inactive, and Joseph Capuozzo, the President of microcap issuer Valentine Beauty Inc. The case centers on a scheme involving the company and two named defendants as well as Eddy Marin and Mark Spierdowis. The scheme began in November 2013. Mr. Marin, who controlled Valentine Beauty, caused the firm to issue shares to affiliated individuals and entities including the named defendants. More than 50 million free trading shares – about 90% of the float – was issued. Mr. Fisher received a block that included 2 million shares that were issued based on his false opinion letter. Subsequently, Messrs. Fisher and Capuozzo began a coordinated marketing campaign using firm press releases coupled with internet and email touts which focused on the liquidity of the stock. Defendants coordinated their stock transactions, reaping profits of $100,132 for Mr. Fischer and $52,516 for Mr. Capuozzo. The complaint alleges violations of Securities Act sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act section 10(b). Each Defendant agreed to settle the case. Each consented to the entry of a permanent injunction based on the sections cited in the complaint. Each agreed to the entry of a permanent penny stock bar. Mr. Capuozzo, in addition, agreed to the entry of an officer and director bar. Monetary relief will be considered by the Court at a later date. The U.S. Attorney’s Office for the Southern District of Florida filed parallel criminal charges. See Lit. Rel. No. 24322 (Oct. 22, 2018).

Criminal cases

Manipulation: U.S. v. Hand, No. 1:15-cr-10386 (D. Mass.) is an action in which Jehu Hand, a securities attorney, is the defendant. Mr. Hand was convicted in May 2018 following a 13-day trial, of conspiracy, securities fraud and wire fraud. The Court sentenced him this week to serve 66 months in prison followed by three years of supervised release. Restitution will be addressed at a later date. The charges were based on two fraudulent stock manipulation schemes which caused more than $1.5 million in losses. One scheme involved the shares of Greenway Technology while the other centered on those of Crown Marketing. The schemes were similar. Mr. Hand and others concealed their ownership of large blocks of shares, false opinions were sent to the transfer agents in one scheme, stock promoters were hired to push up the price and false and misleading statements were made to investors who purchased shares. See also SEC v. Hand, Civil Action No. 1:15-cv-14109 (D. Mass.).

Manipulation: U.S. v. Knox, No. 1:8-cr-10385 (D. Mass.). Roger Knox is a U.K. national residing in Switzerland. He was indicted on one count of securities fraud and one count of conspiracy to commit securities fraud. The indictment followed his arrest earlier this month. Mr. Knox ran a firm initially known as Silverton but later renamed Wintercap. It claimed to be an asset manager. In fact the firm served as a vehicle for selling massive amounts of penny stock on behalf of so-called “control groups” — those who secretly own large blocks of penny stocks through a variety of entities and accounts. The transactions were part of campaigns by those who actually controlled the shares to artificially inflate the share price and trading volume. Stated differently, Mr. Knox facilitated international pump-and-dump manipulation schemes, according to the charges. In the end Mr. Knox channeled the funds back to persons in the “control groups” located in the United States and other jurisdictions. The trading profits were thus returned to those who controlled the shares. The case is pending. See also SEC v. Knox, Civil Action No. 1:16-cv-12858 (D. Mass.).

Australia

Study: The Australian Securities and Investment Commission released a report of a pilot study by the Law Faculty of the University of New South Wales on the deterrent effect of Enforceable Undertakings on peer financial services and credit providers. The study was commissioned in June 2017 as a pilot in response to a recommendation of the Australian National Audit Office that the ASIC should periodically assess the effectiveness of enforceable undertakings (here).

Remarks: Cathie Armour, Commissioner, Australian Securities and Investment Commission, delivered remarks at the ISDA Annual Australia Conference (Oct. 23, 2018). Her remarks began with a review of market conduct in the OTC derivatives markets and reviewed certain reforms and Australia’s implementation of the G20 OTC derivatives reforms (here).

U.K.

Manipulation: The Serious Frauds Office announced charges against Andreas Hauschile for conspiracy to defraud in connection with its investigation into the manipulation of the Euro Interbank Offered Rate. Mr. Hauschild had been arrested in Italy and returned to the U.K.

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by T. GormanPosted on Posted in SECActions

Christopher Faulkner, the self-styled “Frack Master,” at one time was a media star with frequent appearances on CNBC, CNN International, Fox Business news, the BBC and a weekly radio talk show in Dallas, all discussing oil-and-gas topics. Investors flocked to his offerings of turnkey interests in oil and gas properties. Over $80 million was raised – far more than necessary to conduct the drilling investors were told about. Yet by 2016 the operation teetered on the verge of collapse for lack of cash. The next year the SEC obtained a freeze order and the appointment of a receiver.

Now the Frack Master faces years in prison and crippling debt. He settled with the Commission, agreeing to the entry of permanent injunctions based on various sections of the federal securities laws while agreeing to pay disgorgement of $23.8 million. He will also be barred from serving as an officer or director of any public company and from participating in any penny stock offering. SEC v. Faulkner, Civil Action No. 3;16-cv-01735 (N.D. Tx. Filed June 24, 2016). At the same time Frack Master Faulkner settled with the U.S. Attorney’s Office, entering into a plea agreement based on securities fraud, money laundering and tax evasion charges. He has agreed to serve 12 years in prison. U.S. v. Faulkner, No. 3:18-cr-00500 (N.D. Tx.).

The SEC’s complaint named as defendants: Christopher Faulkner, President and CEO of defendant Breitling Energy Corporation, registered under Section 12(b) with the SEC; Breitling Oil & Gas Corporation; Crude Energy, LLC and Patriot Energy, Inc., both controlled by Mr. Faulkner; Jeremy Wagers, a Texas Attorney; Judson Hoover, a CPA and Breitling Energy Corp. CFO; Parker Hallam; co-founded of Breitling and president of defendant Crude Energy; Joseph Simo, the owner of Simo Energy, LLC, a Dallas petroleum geology consulting firm that services Breitling Oil, Breitling Energy, Crude Energy and Patriot Energy; Dustin Miller Rodreguez, co-founder of Breitling Oil and its CIO; Beth Handkins, Crude Energy’s COO; and Gilbert Steedly, Breitling Energy’s v.p. of capital markets.

Mr. Faulkner created a fraudulent offering scheme using Breitling Oil which was later essentially replicated with other firms, including publically traded Breitling Energy. He began in 2011 telling investors they could acquire an interest in “turnkey” oil and gas working interests. Mr. Faulkner ran the operations in large measure while Messrs. Hallam and Miller directed the sale process.

The sales process was built on a series of misrepresentations. Those began with the background of Mr. Faulkner who falsely claimed to hold masters and doctorate degrees and have extensive oil and gas experience – the media appearances were arranged by Mr. Faulkner’s public relations firm to promote his book.

Interests in oil-and-gas properties were sold. Many of the agreements had a continuous drilling provision which if not complied with would result in the interest reverting to its original holder. The provisions were not disclosed. Investors were furnished with an estimated cost to drill and complete the wells as well as the amount the investment would earn. Mr. Faulkner received estimates for drilling and completion costs from operators that actually drilled and completed the wells in which Breitling Oil and the other firms held interests. Investors were not told that he took those estimates and inflated them before they were presented in connection with selling the shares.

The offering materials also included reports by geologist Joseph Simo. Those reports recommended drilling wells on the prospects. The reports frequently included production projections. Those projections were built on historical performance numbers from property in the vicinity and an assumption that a new drilling would perform as well as the best properties. No basis was offered for this assumption. Mr. Simo was held out to the public as an independent expert – his affiliation with Breitling Oil was not disclosed.

Over time Breitling Energy, a public company, essentially became Breitling Oil’s success along with Crude Energy and later Patriot Energy. Crude Energy became the covert marketing arm of Breitling Energy. Interests were marketed using essential the same approach as that used for Breitling Oil.

Beginning in late 2013, and continuing through April 2015, Mr. Faulkner directed that about $36 million be transferred from Crude Energy to Breitling Energy. He also had Breitling Energy make payments of over $18 million on his American Express cards in addition to other claimed reimbursements he received that had no support. Reports were filed with the Commission for the firm at the direction of Mr. Faulkner. Those reports did not disclose the firm’s relationship with Crude Energy or the results of operations.

In late 2014 the share price of Breitling Energy tumbled along with those of other oil firm stocks as the price of oil plummeted. In an effort to prop up the price, Mr. Faulkner diverted hundreds of thousands of dollars from Breitling Energy to two stock trading accounts he controlled. He engaged in heavy trading through the two nominee accounts and at some points marked the close in an effort to manipulate the share price.

In December 2015 the oil and gas sales operation for Breitling Energy was moved from Crude Energy to Patriot Energy following a dispute involving Mr. Faulkner and one of his confederates. Mr. Faulkner directed the transfer of millions of dollars from Patriot Energy to Breitling Energy. Portions of the money went to pay his personal expenses.

By April 2016 the scheme began to collapse. Despite raising significantly more money than was required to drill, test and complete prospects, Mr. Faulkner had drained so much cash from the operation that business could not continue. Operations were shuttered. This triggered certain provisions in many of the agreements under which the interests were re-acquired by the original holder. The investors were left with nothing. Overall Defendants had raised about $80 million in more than 20 oil and gas offerings from hundreds of investors. Mr. Faulkner had misappropriated at least $30 million. The Commission’s complaint alleged violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) and 16(a).

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