by T. GormanPosted on Posted in SECActions

Ponzi and investment scheme cases are a staple of SEC enforcement in the post Madoff world. Emerging, however, may be a new trend based on a subset of these frauds – investments in ATM machines. At the close of last month the Commission filed an investment fund fraud case centered on the solicitation of investors for a business which operated ATM machines. SEC v. Ferguson, Civil Action No. 3:14-cv-04188 (N.D. Cal. Filed September 29, 2014). Now the Commission has brought another Ponzi scheme case centered on the lease of ATM machines. SEC v. Nationwide Automated Systems, Inc., Civil Action No. CV 14 07249 (C.D. Cal. Unsealed October 7, 2014).

Nationwide names as defendants the company, Joel Gillis and Edward Wishner. The company purports to be an ATM machine provider which works with high-traffic retail locations and claims to have 80 branches and 1,000 certified technicians on standby. Nationwide claims to service more than $1 billion in ATM transactions per month. Mr. Gillis is the president of Nationwide. He essentially runs the business. Mr. Wishner is the treasurer, vice president and secretary of the company.

Beginning in 1999, and continuing to the present, Nationwide and Mr. Gillis have offered securities in the form of ATM sale and leaseback agreements to the public. Since January 2013 the Defendants have raised about $120 million from investors through the sale of the ATM leaseback offering.

Defendants used a standard set of agreements to implement their scheme. Those included an ATM Equipment Purchase Agreement, a lease agreement and an addendum. Typically investors paid $12,000 to purchase an ATM. The machine was then leased back to the defendants who operated it. Investors agreed in the contracts not to interfere with the operation of the machine which included not ever contacting the site where it was installed.

Nationwide agreed to pay the investor $0.50 for each approved transaction at the machine. In addition, the investor was guaranteed a return of 20% or more and was assured that the firm had a 19 year track record of success.

Payments were in fact made to investors who were also provided a monthly statement regarding their investment. The payments came largely from money paid to the company by other investors. For example, during April, May and June 2014 over $23 million was deposited in the Nationwide bank account. Only a little over $390,000 came from legitimate ATM transactions. At the same time about $18.4 million was deposited from investors. Yet the firm paid about $23.4 million to investors under the sale and leaseback agreements. Portions of the money raised were also transferred to entities affiliated with Mr. Wishner.

In August 2014 Nationwide bounced about $3 million in checks written to investors. By the end of the month the firm’s bank accounts were reduced to about $200,000. Hundreds of investors called seeking payment. Investors were offered excuses. At the same time the defendants continued to raise money from other investors. For example, in late August and early September 2014 about $3.8 million was raised from investors. During the same period only $52,436 was raised from ATM transactions while about $2 million was paid out to investors.

The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 20(a), Securities Act Sections 5(a) and (c) and of each subsection of 17(a). The case is pending. See also Lit. Rel. No 23106 (October 8, 2014).

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by T. GormanPosted on Posted in SECActions

A critical element in a Section 10(b) and Rule 10b-5 securities fraud claim for damages is loss causation. Mandated as a key component of such a claim by the PSLRA, the element provides the essential link between the alleged injury and the claimed damages. It is not enough that the plaintiff claim the price of the securities purchased was inflated by the fraud. Rather, the PSLRA, as interpreted by the Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), requires plaintiffs demonstrate that the truth emerged about the fraud and that he share price drop resulted primarily from the revelation of that fraud.

A recent Fifth Circuit decision concluded that the truth emerged – or enough of it – through a series of disclosures despite the fact that each may not have been sufficient to inform the market of the truth. Public Employees’ Retirement System of Mississippi v. Amedisys, No. 13-30580 (5th Cir. Decided October 2, 2014).

Amedisys provides home health services to patients with chronic health problems. About 90% of its revenue comes from Medicare payments. During the class period Medicare paid a flat fee for treatment of a patient with at least five but fewer than ten therapy visits per episode – a course of treatment over sixty days. If the number of treatments exceeded ten, more was paid. In 2008 Medicare revised the rules, dropping the ten visit threshold in favor of paying increased reimbursements upon the occurrence of six, fourteen and twenty visits during an episode for medically necessary services.

Plaintiffs claim that the company committed fraud by pressuring employees into providing medically unnecessary treatment visits to hit the more lucrative reimbursement thresholds. As the fraud unfolded the defendants, which include the company and several of its officers, made a series of materially false statements which artificially inflated the price of Amedisys’ stock. The truth finally emerged through a series of five partial disclosures, according to the complaint. The share price dropped, injuring plaintiffs.

The district court found the five partial disclosures insufficient to reveal the truth about the fraud and dismissed for not adequately pleading loss causation. The First Circuit reversed.

The five partial disclosures are:

  • Research report: The report raised questions about the firm’s accounting and Medicare billing practices. The share price dropped over 17% the day it was issued despite contrary claims by the company.
  • Employee departures: The company President and CEO and its CIO resigned to pursue other interests. The share price dropped over 21%.
  • WSJ: A study published in the Wall Street Journal of Medicare reimbursements by a Yale professor analyzed payments to Amedisys, revealing a questionable pattern of home visits clustered around reimbursement targets that changed after the revision of the targets. It also quoted a former company nurse who stated employees were told to get 10 visits, the last of which was not always necessary. The share price dropped over 6% following publication of the article.
  • Government investigations: The Senate Finance Committee, the SEC and the DOJ all launched inquiries regarding the Medicare billing practices of the company following the Wall Street Journal article.
  • Disappointing quarterly earnings: The company announced disappointing quarterly results for the second quarter. The share price declined over 24%.

The critical question here is whether the relevant truth emerged. This means that “the truth disclosed must make the existence of the actionable fraud more probable than it would be without that alleged fact, taken as true,” according to the Court. The disclosure need not be in one episode – it can gradually be perceived in the market place.

Here each of the events may not be sufficient to establish loss causation. The report is “admittedly inconclusive . . . Speculation of wrongdoing cannot by itself arise to a corrective disclosure,” according to the Court. Likewise, the resignation of the officers by itself is insufficient, although the share price drop is not insignificant.

The Wall Street Journal article, while based on public facts which normally are insufficient to reveal the truth, does contain new information – an expert analysis. The analysis of complex economic data understandable only through expert analysis does plausibly present new information that is not merely confirmatory.

Finally, the Court considered the disappointing quarterly results and the three government inquiries. While normally the initiation of an investigation is not sufficient to establish loss causation, in this case these facts must be considered with the others. Media speculation here was followed by three government investigations targeting the reimbursement practices of the company. In the glare of this spotlight Amedisys could no longer game the system and its earnings dropped. Throughout all of these events the share price dropped significantly. Collectively “the whole is greater than the sum of its parts.” Collectively, these facts are sufficient to demonstrate that the truth emerged, establishing at this stage of the case, loss causation.

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