This Week In Securities Litigation (The week ending June 19, 2015)
The Commission chose to appeal the decision in Hill v. SEC in which the Court held that the manner in which SEC Administrative Law Judges are retained violates the Appointment Clause of the Constitution. While the Court pointed out that the Commission could easily remedy the situation, the agency has chosen to contest the ruling.
Under its Municipalities Continuing Disclosure Cooperation Initiative the SEC announced the settlement of 36 proceedings involving municipal issuers who self-reported violations in connection with the sale of municipal bonds. The Commission also filed a settled insider trading case as an administrative proceeding, two misappropriation cases and an action involving security based swaps
Remarks: Commissioner Kara Stein delivered remarks titled “Mutual Funds – The Next 75 Years” at the Brookings Institution, Washington, D.C. (June 15, 2015). Her remarks reviewed the history of the Investment Company Act and areas which may need new rule making (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive cases and 41 administrative actions, excluding 12j and tag-along proceedings.
Municipal securities: In the Matter of William Blain & Co., Adm. Proc. File No. 3-16640 (June 18, 2015) is one of 36 actions involving firms that self-reported violations in connection with the sale of municipal securities. Under the Municipalities Continuing Disclosure Cooperation Initiative, announced in March 2014, the Commission offered favorable settlement terms to municipal bond underwriters and issuers who self-reported securities law violations. The actions here focus on 2010 to 2014. The firms selling municipal bonds used offering documents containing materially false statements or omissions regarding the bond issuers’ compliance with continuing disclosure obligations. The firms also failed to conduct adequate due diligence to identify misstatements and omissions prior to selling the bonds. Each firm self-reported, agreed to a series of undertakings, consented to the entry of a cease and desist order based on Securities Act Section 17(a)(2) and agreed to pay a civil penalty based on the number and size of the fraudulent offerings which could not exceed $500,000. The penalties imposed in this group of actions ranged from the maximum of $500,000, paid by seven firms which included Goldman, Sachs & Co, J.P Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Inc., Morgan Stanley & Co. LLC, Raymond James & Associates, Inc., Robert W. Baird & Co. and Stifel, Nicolaus & Company, Inc., to a low of $60,000 paid by Loop Capital Markets, LLC.
Manipulation: SEC v. Norstra Energy Inc., Civil Action No. 1:15-cv-04751 (S.D.N.Y. Filed June 18 2015) is an action which named as defendants Norstra, a purported oil exploration and drilling firm, Glen Landry, its president and CEO, and Eric Danny, a paid endorser of Norstra and the publisher of a stock news letter. Beginning in March 2013 Mr. Landry made a series of false and misleading statements about his firm and its prospects and reserves in press releases, on the firm’s website and in Commission filings. Mr. Danny made similar claims in mailers and spam e-mails he put out. As a result the stock price of Norstra increased from about $0.35 to over $2.00 from the Spring of 2013 through June of that year. The Commission suspended trading. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23290 (June 18, 2015).
Security based swaps: In the Matter of Sand Hill Exchange, Adm. Proc. File No. 3-16598 (June 17, 2015). Sand Hill Exchange was created by Gerritt Hall and Elaine Ou, both named as Respondents along with their business. Mr. Hall and Ms. Ou sought to create a business tied to valuing start-up enterprises. At first they created essentially a fantasy investment, then a contest and subsequently a game. Eventually they created a security based swap investment. In this model users deposited cash or bitcoins and then bought or sold what were called “smart contracts” – arrangements tied to actual companies on which users could make a profit. Profits and losses came from liquidity events. If the referenced firm experienced a liquidity event such as an IPO, merger or dissolution, the contract buyer received one dollar for every $1 billion that the company was valued at. The payments were funded by the two founders. The reference companies included Uber, Pinterest, Snapchat and Coinbase, all private firms with securities outstanding. The firms were listed on the website of the exchange. In an effort to attract users, the two founders made exaggerated claims. Respondents were in fact selling derivatives linked to the value of private companies which were bought and sold by about 83 users. Dodd-Frank created a regime for the sale of such instruments that involve persons who are not eligible contract participants, making it illegal to sell to them absent an effective registration statement and off a national securities exchange. Here Sand Hill violated these provisions. When the SEC staff contacted Respondents they terminated the business. They also agreed to refund user money. To resolve the proceeding, each Respondent consented to the entry of a cease and desist order based on Securities Act Section 5(e) and Exchange Act Section 6(1). In addition, Sand Hill agreed to pay a penalty of $20,000.
Failure re advisory contact process: In the Matter of Commonwealth Capital Management, LLC, Adm. Proc. File No. 3-16599 (June 17, 2015) is a proceeding which names as Respondents: Commonwealth Capital Management, LLC, a registered adviser; Commonwealth Shareholder Services, Inc., a mutual fund administrator; John Pasco, III, the owner of CCM and CSS; J. Gordon McKinley, II, a member of the World Funds Trust, an open ended investment company; Robert Burke, also a member of the WFT board; and Franklin A. Trice, III, an employee of the service providers and the sole interested trustee of WFT for a period. The action centers on the contract approval process. Specifically, Investment Company Act Section 15(c) requires that board members of a registered company request and evaluate the adviser based on such information as may be reasonably necessary. That information must be made available by the adviser. Here, in connection with a meeting of the board of trustees of WFT, the then trustees, Messrs. McKinley, Burke and Trice, requested the required information but in certain instances did not receive it. Similarly, in connection with two meeting of the board of directors of WFI the then independent directors requested the required information but in certain instances did not receive it. Under Section 30(e) in the fund’s next report to shareholders there must contain a discussion of the factors and conclusions regarding the contract approval process. Here CSS was responsible for preparing the reports of the WFI funds for 2010 but failed to include the required information, causing WFI to violate the Section. Respondents CCM, Pasco, McKinley, Burke and Trice resolved the matter, consenting to the entry of a cease and desist order based on Section 15(c) of the Investment Company Act. Respondent CSS consented to the entry of a similar order based on Section ICA Section 3)(e). Messrs. McKinley, Burke and Trice will also each pay a civil penalty of $3,250. Respondents CCM, CSS and Pasco will, jointly and severally, pay a penalty of $50,000.
Misappropriation: In the Matter of SFX Financial Advisory Management Enterprises, Inc., Adm. Proc. File No 3-16591 (June 15, 2015); In the Matter of Brian J. Ourand, Adm. Proc File No. 3-16590 (June 15, 2015). Respondents in the first action are SFX Financial, a registered investment adviser, and Eugene Mason, the firm’s CCO since 2004. Brian Ourand, the firm’s vice president from 2003 to 2007, and President until August 2011 when he was terminated, is the Respondent in the second proceeding. SFX had several clients for whom it had authority to withdraw and deposit assets from bank and brokerage accounts. Mr. Ourand had discretionary authority to trade in client accounts. He also had authority over client bank accounts to pay bills, transfer money and deposit checks. From 2006 through 2011 Mr. Ourand misappropriated at least $670,000 from client accounts, according to the Orders. SFX had compliance policies and procedures in view of the significant risks that individuals could misappropriate client funds. Their Form ADV referenced procedures. In fact the firm’s procedures were inadequate and the disclosure in its Form ADV was inaccurate. The Order alleges violations of Advisers Act Sections 206(2), 203(e)(6) and 206(4). SFX and Mr. Mason resolved the proceeding. SFX consented to the entry of a cease and desist order based on Advisers Act Sections 206(2), 206(4) and 207 and to a censure. In addition, the firm agreed to pay a penalty of $150,000. Mr. Mason consented to the entry of a cease and desist order based on Advisers Sections 206(4) and 207. He also agreed to pay a penalty of $25,000. The Order as to Mr. Ourand alleges violations of Advisers Act Sections 206(1) and 206(2). It will be set for hearing.
Misappropriation: SEC v. Intervinvest Corporation, Civil Action No. 15-cv-12350 (D. Mass. Filed June 17, 2015) is an action against the investment advisory firm and its owner, Hans Peter Black. The complaint alleges that clients may have lost as much as $12 million which Mr. Black caused to be siphoned off and invested in Canadian penny stock mining companies in which he holds undisclosed interests. The complaint alleges violations of Advisers Act Sections 206(1) and (2), Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23288 (June 17, 2015).
Insider trading: In the Matter of Helmut Anscheringer, Adm. Proc. File No. 3-16589 (June 15, 2015) is an action which centers on the acquisition of Authen Tech, Inc. by Apple, Inc., announced on July 27, 2012. Respondent Anscheringer is a resident of Basel, Switzerland who owns residential property in Naples, Florida. He has been a friend and business colleague of Individual A for 30 years. The deal traces to late 2011 when Apple expressed an interest in the fingerprint sensor technology owned by Authen Tech. Following discussions, on May 1, 2012 Apple proposed acquiring the company. Subsequently, the two firms worked on the terms of the acquisition and the licensing agreements. Individual A is an immediate family member of an Authen Tech executive who was active in the negotiations. The executive learned about Apple’s May 1 proposal, according to the Order. He later communicated information about the offer to his family. Mr. Anscheringer has known, and been friends with, Individual A for about thirty years. He knew that his friend was a member of a family, one of whom was an executive at Authen. On May 18, 2012 Mr. Anscheringer communicated with Individual A, according to the Order. That same day he purchased Authen securities for the first time. On two days in late July he again purchased Authen securities, acquiring 4,000 call option contracts. He also purchased an additional 2,000 shares through a company account of which he was the beneficiary. Following the announcement of the deal the share price of Authen increased about 60%. Mr. Anscheringer realized profits of $1,820,024. The Order alleges violations of Exchange Act Section 10(b). To resolve the matter Mr. Anscheringer consented to the entry of cease and desist order based on Exchange Act Section 10(b). He also agreed to disgorge his trading profits and to pay prejudgment interest and a civil penalty of $910,012.
Insider trading: SEC v. Miller, Civil Action No. 15-cv-4585 (S.D.N.Y. Filed June 12, 20145) centers on the Brocade-Foundry transaction. Following the deal announcement, made after the close of trading on July 21, 2008, the share price increased 32% on news that the deal was priced at $18.50 per share in cash plus 0.0907 shares of Brocade stock. As the firm’s chief information officer, Mr. Riley learned about the deal three weeks earlier on July 1, 2008. Sixteen days after learning about the deal he told his friend and former colleague, Matthew Teeple about the proposed transaction. He in turn caused Artis Capital to purchase shares. The same day – July 21 – Mr. Teeple called his friend Andrew Miller and told him he should purchase Foundry stock. One hour later Mr. Miller bought 850 shares in his mother’s account. Although the Brocade – Foundry deal was announced on July 21, it was not completed until December 18, 2008. During the period there were difficulties with financing. Messrs. Riley and Teeple kept in touch, discussing key events as did Messrs. Teeple and Miller. Following one conversation Mr. Miller sold all of his shares and bought 55 put options with a strike price of $15 per share and an expiration date of November 2008. When delays in the shareholder vote were announced the firm’s share price dropped. Mr. Miller reaped profits and avoided losses of over $40,000. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Miller cooperated with the SEC and the U.S. Attorney’s Office. He resolved the Commission’s charges by agreeing to the entry of a permanent antifraud injunction. He will pay disgorgement of $40,136 along with prejudgment interest and a civil penalty of $20,068. See Lit. Rel. No. 23284 (June 12 2015).
U.S. v. Sigelman (D. N.J.) is an action charging the former co-CEO of PetroTiger with FCPA violations. On June 1, 2015 trial began. In mid trial Mr. Siegelman pleaded guilty to one count of conspiracy to violate the FCPA. The charges were based on at least four payments totaling $333,500 made in 2010 from by the firm to an account in Columbia held by David Duran, an employee of Ecopetrol, S.A., the state controlled oil company in the country. PetroTiger, an oil services company, was seeking a contract with Ecopetrol worth $39 million. Mr. Sigelman was sentenced to pay a fine of $100,000. The firm was not charged.
Dishonest conduct: Barry Hassell, formerly a director B.D. & W.J. Hassell Pty Ltd. and an authorized representative of a number of Australian financial services firms, pleaded guilty to 39 charges which include providing the Australian Securities Investment Commission with misleading information and failing to provide a disclosure document to clients over a period of seven years. He was sentenced to serve 12 months in prison, to be released on his own recognizance of $100 to be of good behavior for a period of 12 months.
Insider trading: Daniel Joffe and Nathan Stromer each pleaded guilty to two counts of insider trading. The two men admitted that in November 2006 Mr. Stromer received inside information through his position at Moody’s as an analyst regarding a proposed takeover of Alinta Infrastructure Holdings Ltd. by Alinta Ltd. He furnished that information to Mr. Stromer who purchased contracts for a difference. Mr. Joffee was sentenced to serve 27 months in prison while Mr. Stromer was sentenced to serve 24 months. Both sentences were suspended on payment of a bond and condition of good behavior for two years. In addition, Mr. Stromer will pay a penalty of $229,349.87.
Unregistered broker: Lo Chun Lam pleaded guilty to operating a business advising on futures contracts without being registered. From May through August 2013 Mr. Lo gave advice on futures contracts in the name of “Cat Sir” or “Trader Cat” to subscribers who paid $3,750 to join private discussion groups conducted through Facebook and LINE, a smart phone application.