by T. GormanPosted on Posted in SECActions

This week the SEC and the DOJ filed a settled FCPA action. The disgorgement paid by the issuer put the case at number ten on the list for the largest such amounts paid in an SEC FCPA case.

The Commission brought cases in groups this week. Broken windows continued with a group of failure to file actions. Another group of actions centered on the sale of junk bonds below the minimum denomination, the first based on the rule prohibiting that practice. The SEC also brought two pump and dump cases, three offering fraud actions and another insider trading case as an administrative proceeding.

CFTC

Remarks: Commissioner Sharon Bowen addressed the FIA Expo Inaugural (November 5, 2014). The remakes reviewed the completion and implementation of Dodd-Frank rules and planning for the next big thing (here).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the SEC filed 5 civil injunctive action and 28 administrative proceedings, excluding 12j and tag-along-actions.

Municipal bonds: In the Matter of City of Allen Park, Michigan, Adm. Proc. File No. 3-16259 (November 6, 2014); SEC v Burtka, Civil Action No. 2:14-cv-14278 (E.D. Mich. November 6, 2014); SEC v. Waidelich, Civil Action No. 2:14-cv-14279 (E.D. Mich. Filed November 6, 2014). These are actions arise out of the sale of municipal bonds by the city and its former administrator, Eric Waidelich, and former mayor, Gary Burtka. Two bond offerings centered on a plan begun in 2008 to build a $146 million movie studio. By the time of the offerings, the plan deteriorated into creating a vocational facility. Nevertheless, the offering documents were not amended to reflect this fact and the municipal financial information was not correct. Shortly after the offerings the plan collapsed. The Order as to the city alleges violations of Securities Act Section 17(a)(2). The city consented to the entry of a cease and desist order based on the cited sections. The two civil injunctive actions allege violations of Exchange Act Section 10(b). Those actions are pending.

Manipulation: SEC v. Weed, Civil Action No. 1:14-cv-14099 (D. Mass. Filed November 6, 2014) is an action against Richard Weed, Thomas Brazil and Coleman Flaherty III. The complaint alleges a pump and dump scheme. Specifically, beginning as early as 2006 and continuing through 2010, the defendants structured a company which became known as CitySide Tickets Inc., using a reverse merger, and then manipulated the shares with false promotional material. As the share price increased defendants Brazil and Flaherty, with the assistance of attorney Brazil, reaped about $3 million in profits from the scheme. The complaint alleges violations of Exchange Act Section 10(b), each subsection of Securities Act Section 17(a) and Securities Act Sections and 5(a) and 5(c). The case is pending. A parallel criminal case was filed by the U.S. Attorney.

Failure to file: In the Matter of Worthington Energy, Inc., Adm. Proc. File No. 3-16256 (November 5, 2014) is one of ten cases brought for failure to comply with certain disclosure requirements generally based on entering into a material contract or selling unregistered securities. Each proceeding was resolve with a cease and desist order and the a file ranging from $25,000 to $50,000.

Municipal bonds: In the Matter of UBS Financial Services, Inc., Adm. Proc. File No. 3-16239 (November 3, 2014) is one of thirteen actions against dealers in Puerto Rican Junk bonds. Each alleges a violation of MSRB Rule G-15(f) which establishes minimum denomination requirements. Each of the firms involved sold below those amounts. The firms include Charles Schwab, Hapoalim Securities, Interactive Broker, J.P. Morgan, Investment Professionals, Lebenthal & Co., National Securities, Riedl First Securities, Stifel Nicolaus, TD Ameritrade and Wedbush Securities. Each firm settled, agreeing the entry of a cease and desist order, a censure and the payment of a fine ranging from $54,000 to $130,000. These are the first actions based on this rule.

Manipulation: SEC v. Streibinger (N.D. Ga. Filed November 3, 2014) is an action against Bruce Streibinger, Howard Chapman and Muskateer Investments, Inc. The complaint alleges a pump and dump scheme involving the shares of Amerias Energy Company. The scheme began in May 2009 with a reverse merger done with Americas and another start-up firm. A massive promotional campaign was then undertaken using false publicity. As the stock price rose Messrs. Strebinger and Chapman sold shares, reaping $17 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(d) and 20(b). The case is in litigation.

Insider trading: In the Matter of Steven Durrelle Williams, Civil Action No. 3-146246 (November 3, 2014). Mr. Williams was the CEO of Intellicheck Mobilisa, Inc. In the third quarter of 2012 the revenue for the firm declined. Beginning on September 14, and continuing for the next four days, Mr. Williams was involved in a series of communications regarding the potentially disappointing quarter. On September 19 and 20 Mr. Williams sold a block of his company stock. On November 8 Inellicheck released its disappointing third quarter results. The stock closed down from the prior day’s close 11.6%. Over the next two days the price continued to decline. Mr. Williams avoided losses of $103, 712. The investor suffered at least $98,514 in damages from Mr. Williams’ conduct, according to the Order which alleges violations of Securities Act Sections 17(a) and Exchange Act Section 10(b). To resolve the proceeding Mr. Williams consented to the entry of a cease and desist order based on the Sections cited in the Order. The order also prohibits Mr. Williams from serving as an officer or director of any issuer for two years and requires that he pay $103,712 in disgorgement, prejudgment interest, and a civil penalty of $75,000.

Microcap fraud: SEC v. James Wheeler, CivilAction No. 11-cv-12117 (D. Mass.) is a previously filed action against Mr. Wheeler, MicroHoldings, US, Inc. and others. The action centered on a kickback scheme exposed by an undercover FBI operation. The Court entered judgments by consent against Mr. Wheeler and MicroHoldings, enjoining each from future violations of Exchange Act Section 10(b). The order as to Mr. Williams also direct that he pay disgorgement of $24,000 which is deemed satisfied by a forfeiture order in the related criminal case. The order also prohibits Mr. Wheeler from serving as an officer or director of any issuer and from participating in any penny stock offering. See Lit. Release No. 23127 (November 4, 2014).

Offering fraud: In the Matter of Navagate, Inc., Adm. Proc. File No 3-16118 (October 31, 2014); In the Matter of Gregory Osborn, Adm. Proc. File No. 3-16229 (October 31, 2014); In the Matter of Middlebury Securities, LLC, Adm. Proc. File No. 3-16227 (October 31, 2014). Navagate claimed to be a New York based creator and seller of computer software that provided sales force automation to financial services organizations. Respondent Gregory Rorke is the co-founder of the firm. Since1989 Mr. Rorke specialized in turning around companies facing financial difficulties and building new businesses. From 1997 through 2012 he served as an adjunct professor at Columbia Business School where he taught turnaround management, bankruptcy and restructuring in the MBA program. In October 2009 Navagate retained Middlebury Securities LLC, a FINRA registered broker dealer, as placement agent. Its managing partner who handled the account was Gregory Osborn. The plan was to sell Notes with a six month maturity that paid an annual rate of 12%. The rate increased in the event of a default. The Notes were planned as bridge financing to raise between $2 and $2.5 million – later increased to $3.25 million — to an eventual IPO. Between December 2009 and April 2011 Middlebury and Mr. Osborn sold about $3.2 million in Notes. Key to the sale of the Notes was the personal guarantee of Mr. Rorke. In April 2010 Middlebury’s attorneys inserted the Personal Guarantee in the Offering Documents along with a Personal Financial Statement signed by Mr. Rorke. The documents represented that he had no liabilities except those disclosed and that the listed assets were in his name only. The assets included cash, marketable securities, real estate, shares of Navagate and illiquid investment that totaled over $12 million. For the most part, the assets pledged as collateral did not belong to Mr. Rorke, but to his wife who had not executed the guarantee. Significant tax liabilities also were not disclosed. Navagate began defaulting on the Notes in June 2010. Nevertheless, the firm and its founder continued to sell more Notes, raising an additional $2.2 million following the first default. By early 2014 Navagate owed about $1.25 million in principal and about $1.4 million in interest on the Notes. The Order in the Navagate proceeding alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing. The Osborn and Middlebury proceedings alleges violations of the same Sections. Mr. Osborn and Middlebury partially resolved the actions, consenting to the entry of a cease and desist order based on the Sections cited in the Order and to the entry of an order barring him from the securities business. A hearing will be held to determine the amount of the disgorgement, prejudgment interest and civil penalties.

Microcap fraud: SEC v. Smith, Civil Action No. 3:14-cv-03874 (N.D. Tx. Filed October 31, 2014) is an action which names as defendants Charles and Mark Smith. The complaint alleges that the two brothers have operated a fraudulent “shell factory” since 2006. The brothers formed and promoted at least eight public shell companies, four of which they sold in reverse merger transactions. The scheme was implemented by renting small business, promising them an IPO and then soliciting friends and others to buy the shares. False documents were used to promote the companies. Most of the money was kept by the sell companies. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(b), 10(b) and 15(d). The defendants resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, the order directs the defendants to pay disgorgement of $78,750.52 and prejudgment interest. Charles Smith will pay a penalty of $150,000 and be subject to an officer, director and penny stock bars. His brother will pa a penalty of $50,000 and is subject to a three year penny stock bar. See Lit. Rel. No. 23124 (October 31, 2014).

FCPA

In the Matter of Bio-Rad Laboratories, Inc., Adm. Proc. File No. 3-16231 (November 3, 2014). Bio-Rad has two industry segments, Life Science and Clinical Diagnostics.

The French subsidiary, during the time period, paid two foreign corporations called the Russian agents in the papers, commissions of 15% to 30% in connection with contracts in Russia. When a new country manager took over in 2007 he conducted no due diligence regarding the agents although he knew that distribution costs were about 2% to 2.5% in contrast to the large commissions paid to the agents. Overall the agents were paid $4.6 million on sales of $38.6 million. When the contract with the agents was terminated in 2010 the Russian subsidiary of the company lost its first government contract in Russia. Throughout the period the international managers ignored a series of red flags. Those included the fact that the agents could not perform the services required, their payments were requested in installment amounts that avoided the need for additional approvals, many of the contracted for service were not necessary and many of the invoices for the agents were generated by the Russian subsidiary of the firm.

From 2005 through 2009 the country manager of the Vietnam office authorized the payment of bribes to government officials to obtain business. In 2006 when it was discovered that bribes were being paid, the Vietnam office country manager stated that paying bribes was customary in the country. Subsequently, the sales practices were altered to sell in Vietnam through a distributor at a deep at a deep discount. The distributor then sold the products at full price to the government. The charges were booked under various labels. Gross revenue was $23.7 million. In Thailand Bio-Rad acquired a 49% interest in Diamed Thailand as part of an acquisition in October 2007. Little due diligence was done on the subsidiary. At the time of the acquisition Diamed Thailand had an established bribery scheme using a Thi agent to sell diagnostic products to government customers. Bio-Rad’s Asia Pacific GM learned about the practice at a conference but failed to halt the improper payments. From 2007 through 2010 Diamed Thailand made improper payments of $708, 608 which generated sales revenues of $5.5 million.

When the firm discovered the practices it self-reported and conducted an extensive investigation. It provided extensive cooperation to the SEC and the DOJ and undertook significant remedial actions. The Commission’s Order alleged violations of the bribery and books and records and internal control provisions of the FCPA. The company resolved the charges by consenting to the entry of a cease and desist order based on Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). The firm agreed to pay disgorgement of $35,100,000 and prejudgment interest. The criminal charges, based on the actions in Russia, were resolved with a non-prosecution agreement and the payment of a $14.35 million criminal fine.

Australia

Manipulation: The Australian Securities and Investment Commission announced that Dr. Mervyn Jacobson, formerly a director of Genetic Technologies Ltd. was convicted on 33 charges of market manipulation regarding the shares of his firm. The charges were based on actions taken over one year beginning in March 2005 during which Dr. Jacobson took out margin loans to fund the exercise of 49 millions secured by over 150 million shares of the company. To avoid margin calls he manipulated the share price of the stock

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by T. GormanPosted on Posted in SECActions

Broken windows entered a new chapter. Previously, the program focused on the custody rule, Rule 105 and the filing of certain forms such as Form 4 and Schedule 13D. The point is to create SEC omnipresence – the cop on the beat is making arrests for all things big and small, generating deterrance.

Now the program has brought 10 new cases centered on failing to make filings regarding certain financing and stock dilution transactions. Specifically, the new series of cases is based on failing to comply with the following disclosure obligations:

  • Form 8-K, Item 1.01 which requires the disclosure of a material definitive agreement within four days;
  • Form 8-K , Item 3.02 which requires the disclosure within four days of the sale of unregistered equity securities unless they constitute less than 5% of the number of last reported shares outstanding of the class; and
  • Form 10-Q or 10-K which requires the disclosure of the number of outstanding shares of common stock as of the latest practicable date.

The issuers involved include: APT MotoVox Group, Inc., CorWare Inc., ERF Wireless Inc., Green Automotive Company, MineralRite Corporation, Mondial Ventures Inc., Monster Arts Inc., Red Giant Entertainment Inc., Seanlemac International Ltd. and Worthington Energy Inc. Each action was initiated as a settled administrative proceeding. See, e.g., In the Matter of Worthington Energy, Inc., Adm. Proc. File No. 3-16257 (November 5, 2014)(alleging the failure to disclose the issuance of unregistered shares and the existence of the related financing agreement). The fines imposed ranged from $25,000 to $50,000 and a cease and desist order.

Broken Windows is clearly adding a significant number of enforcement cases to the SEC’s total number of actions. Whether this is effective enforcement is another question. If the theory is to create deterrence it seems questionable at best that the hedge fund manager considering insider trading or the corporate CFO who is creating cookie jar reserves is going to think twice about the SEC because the agency has a new computer program that can identify filing and other similar violations. If the idea is to bring large numbers of enforcement actions which generate headlines and keep the name of the agency in the public domain and then, perhaps, deterrence, then the program is clearly a success.

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