THIS WEEK IN SECURITIES LITIGATION (Dec. 30, 2011 to Jan. 7, 2012)
The new year began with Congressional testimony on two recurring subjects: The implementation of the Dodd-Frank Wall Street Reform Act and Congressional insider trading. SEC Chairman Mary Schapiro furnished Congress with a report card on the Commissionâ€™s implementation of the Act while Enforcement Director Khuzami largely reiterated his earlier remarks on the question of legislation restricting congressional insider trading.
As last year drew to a close and the new year began SEC Enforcement intensified its battle over the proposed Citigroup settlement, first appealing Judge Rakoffâ€™s refusal to enter the settlement and then filing a Petition for a Writ of Mandamus. The Commission also brought a proceeding based on the claimed fraudulent use of social media, financial fraud action and investment fund fraud actions.
Testimony on Dodd Frank: SEC Chairman Mary Schapiro testified before the Senate Committee on Banking, Housing and Urban Affairs regarding â€œContinued Oversight of the Implementation of the Wall Street Reform Act.â€ The testimony reviews the Commissionâ€™s on-going efforts to implement Dodd-Frank (here).
Testimony on Congressional Insider Trading: SEC Enforcement Director Robert Khuzami testified before the House Committee on Financial Services regarding H.R. 1148, the Stop Trading on Congressional Knowledge Act. The testimony reiterates remarks made earlier by Mr. Khuzami on the topic of congressional insider trading (here).
SEC Enforcement: Filings and settlements
Financial fraud: SEC v. Life Partners Holdings, Inc., Case No. 6:12-cv-00002 (W.D. Tx. Filed Jan. 4, 2012) is an action against Nasdaq traded Life Partners Holdings, Inc. and its chairman and CEO Brian Pardo, president and general counsel, Scott Peden and CFO David Martin. The complaint alleges that the defendants misled shareholders by failing to disclose that the company was systematically and materially underestimating the life expectancy estimates it used to price transactions. Most of the revenue of the company is derived from brokering life settlements which involve the sale of fractional interests of life insurance policies whose value is keyed to the insuredâ€™s life expectancy. For this purpose the company used life expectancy estimates provided by a doctor with no actuarial training or prior experience in this area. No meaningful due diligence was conducted to determine if the doctorâ€™s methodology and qualifications were appropriate. The complaint claims the three officers were aware that the estimates were systematically and materially short. The complaint also alleges that from fiscal year 2007 through the third quarter of fiscal 2011 the company prematurely recognized revenue and understated impairment expense related to its investment in life settlements. The complaint alleges violations of Exchange Act Section 10(b), 13(a), 13(b)(2)(a) and 13(b)(5) and Securities Act Section 17(a). The complaint also seeks the repayment of certain stock sales profits and bonuses under SOX Section 2002. The case is in litigation.
Investment fraud: In the Matter of Anthony Fields, CPA, Adm. Proc. File No. 3-14684 (Jan. 4, 2012) is a proceeding which centers on allegations that Mr. Fields, doing business as Anthony Fields & Associates and Platinum Securities Brokers, made fraudulent offerings of fictitious securities through various social media including LindedIn. The Order alleges violations of Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Section 15(a), and Sections 203, 204, 204A, 206 and 207 of the Advisers Act. The Commission also issued certain investor alerts regarding the social media in connection with the institution of the proceeding.
Financial fraud: SEC v. JBI, Inc., Civil Action No. 1:12-cv-10012 (D. Mass. Filed Jan. 4, 2012) is an action against JBI, Inc., a technology company, and its CEO John Bordynulk and its former CFO, Ronald Baldwin, Jr. The complaint centers on allegations that shortly before two PIPE offerings the company improperly and materially overstated the value of certain assets to bolster its balance sheet to facilitate those offering. In this regard the company booked media credits at $9.9 million, making them the largest asset on the balance sheet. In fact they should have been recorded at a value of $1 million. The complaint alleges violations of Securities Act Section 17(a and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5. The case is in litigation.
Investment fund scheme: SEC v. Wilcox, Civil Action No. 2;11-cv-01219 (D. Utah Filed Dec. 29, 2012) is an action against Kevin Wilcox, Jennifer Theoennes and Eric Nelson. The complaint centers on a Ponzi scheme operated by Joseph Nelson for which the three defendants raised about $16 million dollars. Specifically, the complaint claims that from mid 2005 through mid 2010 Joseph Nelson and his associates, including at times defendants Wilcox and Thoennes, raised about $16 million from over 100 investors who were falsely told that their funds would be put in promissory notes offered by Joseph Nelsonâ€™s companies. Those companies supposedly invested in merchant portfolios of credit card processing accounts. Investors were told that they would earn returns of 14% to 60% on an annualized basis and an additional premium of 20% to 60% at maturity. In fact Joseph Nelson and his companies never purchased or sold a single merchant portfolio. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. Previously, the Commission filed an action against Joseph Nelson and others.