The broken windows approach to enforcement continued this week. The Commission bundled together eight settled administrative proceedings centered on going private transactions in which the Respondents failed to update their Schedule 13D filings. The agency also brought another Rule 105 action, a father and son market manipulation action, a case centered on the sale of unregistered securities and another based on conflicts.
SEC
Remarks: Chair Mary Jo White delivered remarks titled A Few Observations On Shareholders at Tulane University Law School 27th Annual Corporate Law Institute, New Orleans, La. (March 19, 2015). Chair White commented on shareholder proposals and fee shifting provisions (here).
Remarks; Commissioner Michael S. Pinwowar delivered remarks at the 2015 Mutual Funds and Investment Management Conference, Los Angeles, California (March 16, 2015). His remarks focused on criticisms of the capital markets by prudential regulators (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 1 civil injunctive action and 11 administrative proceeding, excluding 12j and tag-along-actions.
Rule 105: In the Matter of Keyport Capital Management, LLC, Adm. Proc. File No. 3-16449 (March 19, 2015). In March 2013 the registered investment adviser bought shares in a follow-on offering after having sold short just before that transaction. The adviser had profits of $11, 654.62. The Order alleges a violation of Rule 105. To resolve the action the adviser consented to the entry of a cease and desist order based on Rule 105 and agreed to pay disgorgement in the amount of the trading profits, prejudgment interest and a civil penalty of $65,000.
Unregistered securities: In the Matter of Coral Reef Media, LLC, Adm. Proc. File No. 3-16447 (March 17, 2015) is a proceeding which names as Respondents the firm, which has no on-going operations, and David Flake, its founder. From May 2012 through April 2013 the Respondents used fabricated documents to offer and sell shares of Coral Reef stock. The shares were not registered with the Commission and there is no applicable exemption. The Order alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Sections 10(b) and 15(a). To resolve the proceeding Respondents each consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Mr. Flake is barred from the securities business and from participating in any penny stock offering. The Respondents will pay, jointly and severally, disgorgement of $26,000, prejudgment interest and a civil penalty equal to the amount of the disgorgement.
Conflicts: In the Matter of Joseph Stilwell, Adm. Proc. File No. 3-1644 (March 16, 2015) is a proceeding which names as Respondents Stillwell Value LLC, a registered investment adviser, and Mr. Stilwell, its principal owner. The Order alleges that from 2003 through 2013 Respondent directed the Stilwell Funds to make a series of loans totaling about $20 million to other Stilwell Funds to aid their investment strategies – to purchase securities and repay margin. All the loans were repaid. The Respondents, however, failed to disclose the transactions which represent a conflict of interest. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and 207. To resolve the proceeding Respondents consented to the entry of an order based on the Sections cited in the Order and agreed to implement a series of undertakings which include the retention of an independent monitor. The adviser also agreed to the entry of a censure. Respondents will pay disgorgement of $193,356 which is the fees earned, prejudgment interest and a civil money penalty of $250,000.
Financial fraud: SEC v. Woodard, Civil Action No. 2:13cv16 (E.D. Va.) is a previously filed action which named as a defendant Cynthia Sabol, the former CFO of Commonwealth Bankshares, Inc., and others. The action alleged that the bank substantially understated its allowance for loan and lease losses, reported loss before income taxes and real estate repossessed. Ms. Sabol resolved the proceeding and the Court entered a final judgment prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 13(b)(5). The order also requires her to pay a penalty of $55,000 and bars Ms. Sabol from serving as an officer or director of a public company for five years. See Lit. Rel. No. 23218 (March 12, 2015).
Disclosures: In the Matter of Berjaya Lottery Management (H.K.), Adm. Proc. File No. 3-16436 (March 13, 2015) names as a Respondent the Hong Kong based firm which manufactures and distributes computerized lottery and voting systems. The action centers on a going-private transaction regarding International Lottery & Totalizator Systems, Inc., a California based public company. Between July 7 and 10, 2013 the firm took significant steps toward the privatization of International Lottery. Since the firm had acquired a majority holding in International Lottery it had an obligation to promptly amend its Item 4 disclosures on Schedule 13D concerning the transaction. Nevertheless, the firm waited eight months to make the required disclosures regarding the steps taken, contrary to Exchange Act Section 13(d)(2). The firm settled, consenting to the entry of a cease and desist order based on the Section cited in the Order while agreeing to pay a penalty of $75,000.
Disclosures: In the Matter of The Ciabattoni Living Trust Dated August 17, 2000, Adm. Proc. File No. 3-16437 (March 13, 2015) is a proceeding which names the trust as a Respondent. It centers on a going private transaction regarding First Physicians Capital Group, Inc. Related proceedings were filed against the beneficial owners of the shares, Aathony J. Ciabattoni and Jane Ciabattoni. In the Matter of Anthony J. Ciabattoni, Adm. Proc. File No. 3-16438 (March 13, 2015); In the Matter of Jane G. Ciabattoni, Adm. Proc. File No. 3-16439 (March 13, 2015). The Orders state that the Respondents in each proceeding waited over five months to amend their Schedule 13D disclosures after taking significant steps toward a going private transaction regarding First Physicians, contrary to Exchange Act Section 13(d)(2). In addition, Respondents violated Section 16(a) by failing to report material transactions in shares of that group for months. The proceedings were resolved with each Respondent consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the three defendants were ordered to pay a penalty, on a joint and several basis, of $75,000. The settlements reflect the cooperation of the Respondents. See also In the Matter of SMP Investments I, LLC, Adm. Proc. File No. 3-16440 (March 13, 2015)(proceeding also tied to the First Physicians transaction alleging the same type of violations involved in The Ciabattoni Living Trust; resolved with a cease and desist order based on the same Sections and the payment of a penalty of $63,750 on a joint and several basis with Brian Potiker); In the Matter of Brian Potiker, Adm. Proc. File No. 3-16441 (March 13, 2015)(same): In the Matter of William A. Houlihan, Adm. Proc. File No. 3-16442 (March 13 2015)(A proceeding also based on the First Physicians transaction alleging essentially the same violations; settled with a cease and desist order based on the same Sections and the payment of a penalty of $15,000).
Disclosures: In the Matter of Shuipan Lin, Adm. Proc. File No. 3-16435 (March 13 2015) names as a Respondent the CEO of China based Exceeds Company Ltd. The action centers on a going private transaction regarding that firm. After taking several steps to effectuate that transaction Respondent filed to amend his Schedule 13D as required. The proceeding was resolved with Respondent’s consent to a cease and desist order based on Exchange Act Section 13(d)(2) and the payment of a civil penalty of $30,000.
Manipulation: SEC v. Craven, Civil Action No. 15-cv-1820 (S.D.N.Y. Filed March 11, 2015) is an action which names as defendants a father and son team, David Craven and Alex Craven. Both are British citizens who reside in Switzerland. In January 2011 American Energy Development Company filed a registration statement to raise $1 million. After the registration statement became effective the shares were acquired by over 25 investors, including a entity controlled by David Craven. Following a forward split of the shares that entity had about 87% of the outstanding stock in American Energy.
Beginning in October 2011, and continuing through February 2012, the father – son combination used controlled entities to engage in a series of wash sales. The purpose was to increase the share price. Those were followed by a publicity campaign, touting the shares of American Energy. As the PR campaign moved forward the two defendants sold 4.5 million shares at prices ranging from $0.85 to $1.20 or about $4 million in artificially inflated shares. The SEC’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a) and 10(b). The Court entered a temporary freeze order at the time the complaint was filed. The case is pending. See Lit. Rel. No. 23219 (March 12, 2015).
Criminal cases
Perjury: U.S. v. Hart, Case No. 1:15-cr-0084 (S.D.N.Y. Filed February 13, 2015). Steven Hart was employed at Octagon Capital Partners as a portfolio manager. As the portfolio manager he had control over several brokerage accounts for the Octagon Capital Partners Ltd. fund. He also controlled a private investment fund, Octagon Capital Partners, LP, in which he and associates had funds. The SEC began an investigation that focused on whether Mr. Hart had engaged in a series of matched trades or cross trades between his personal fund and the one for which he served as portfolio manager. During the investigation he lied in testimony, claiming the president of the firm authorized the transactions. He also impersonated the president of the firm in phone calls with the staff and repeated the claims. Mr. Hart pleaded guilty to obstruction of justice and perjury. He is awaiting sentencing. The Commission also brought an action against him. SEC v. Hart, Civil Action No. 12 CIV 8986 (S.D.N.Y. Filed December 11, 2012).
Australia
Insider trading: Two employees of the National Australia Bank were convicted in Australia’s largest insider trading case according to the Australian Securities and Investment Commission. The two men received sensitive information from an employee of the Australian Bureau of Statistics. They used the information to enter into foreign exchange derivative products and reaped $7 million from price movements. They were convicted of insider trading, money laundering and abuse of public office .
Hong Kong
Take-overs: The Takeovers and Mergers Panel found that Chow Yei Ching, Joseph Leung Wing Kong and Oscar Chow Vee Tsung breached the mandatory offer requirement under the Code on Takeovers and Mergers. Mr. Chow, the chairman of Chevalier Group, together with his son, Oscar Chow, a director of Chevalier International Holdings Ltd, and Mr. Leung, the chairman of ENM Holdings Ltd., actively co-operated to assist Mr. Kung to obtain or consolidate control over ENM. and avoid triggering a mandatory general offer requirement in the Takeovers Code. A written opinion will be issued.
