This Week In Securities Litigation (Week ending April 1, 2016)
The Supreme Court declined to here Bebo v. SEC, 799 F. 3d 765 (7th Cir. 2015), a suit challenging the SEC’s venue selection. The Court’s order left standing the decision of the circuit court affirming the dismissal of the action for lack of jurisdiction. Similar suits are pending in the second and eleventh circuits.
The SEC filed a series of civil injunctive and administrative actions this week. An action was brought against truck manufacturer Navistar centered on false statements made regarding its efforts to develop a truck engine that would meet certain EPA standards; another false statement case involved a pharmaceutical manufacturer and its efforts to secure FDA approval of a new cancer drug. The Commission also brought an action against a fund manager who essentially looted a fund he created; a second action involed a fund manager who was front running his fund; and another action charged an attorney for acting as an unregistered broker in connection with an EB-5 program.
Remarks: Chair Mary Jo White delivered the Keynote Address at the Mutual Fund Directors Forum 2016 Policy Conference, Washington, D.C. (March 29, 2016). Her remarks focused on the role of independent directors in assessing risk and the enforcement prospective (here).
Remarks: Commissioner J. Christopher Giancario delivered remarks tilted “Regulators and the Blockchain: First, Do No Harm” before the Depository Trust & Clearing Corporation 2016 Blockchain Symposium. The Commissioner discussed the emergence of distributed ledger technology or DLT which is essentially the first attempt at an internet of finance since it may link networks of legal recordkeeping. He discussed the need to have a coordinated regulatory approach for this and a “do no harm” approach to let it develop (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 6 civil injunctive actions and 3 administrative proceedings, excluding 12j and tag-along proceedings.
False statements: In the Matter of Navistar International Corporation, Adm. Proc. File No. 3-17190 (March 31, 2016) is an action which names as a Respondent the manufacturer of commercial and military trucks, busses and similar vehicles. The Order alleges that in 2011 and 2012 the firm made a series of false statements about a truck engine under development. Specifically, Navistar claimed to have under development a truck engine that would meet the 2010 EPA emission standards using a technology that differed from that used by other manufactures. Its initial application for an engine that was incomplete was rejected. Nevertheless, the firm continued, making two more applications. As the project proceeded Navistar issued a series of optimistic press releases despite continued rejection. Finally it abandoned the project. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will also pay a penalty of $7.5 million. See also SEC v. Ustian, Civil Action No. 16-cv-3885 (N.D. Ill. Filed March 31, 2016)(Action against Navistar President Daniel Unstian based on the same facts, alleging violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and 20(a); the action is pending).
False transfers: SEC v. Ponn, Civil Action No. 16-10624 (D. Mass. Filed March 31, 2016) is an action which names as a defendant Nathanial Ponn. Over a period of seven years beginning in 2007 Mr. Ponn opened over 600 brokerage accounts and transferred a total of at least $8.7 million to them. Once the firms received notice of the transfer he began trading securities, purchasing a total of about $2.9 million worth of stock. The transfers, which take two or three days, were either underfunded or fake. While the internal procedures of the firms generally precluded Mr. Ponn from withdrawing any funds – he got a total of $300 – the firms suffered losses of about $26,000. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23508 (March 31, 2016). The U.S. Attorney’s Office for the District of Massachusetts filed a parallel criminal action
Misappropriation: In the Matter of Burrill Capital Management, LLC, Adm. Proc. File No. 3-17186 (March 30, 2016). Steven Burrill is the founder of Burrill Capital, an exempt reporting adviser with the Commission. It advised several venture capital funds operated by Mr. Burrill, including Fund III. Respondents Victor Herbert and Helena Sen served, respectively, as Chief Legal Counsel of Burrill & Co., an affiliate of Burrill Capital, and controller. In 2006 Mr. Burrill formed Fund III, a $283 million venture capital fund focused on investments in life sciences. Its limited partnership agreement delineated the fees to be paid each fiscal quarter for services. There was no provision authorizing the advance payment of fees or for loans. By late 2007 Burrill Capital began to experience cash flow shortages. Indeed, the Burrill related entities, as well as Mr. Burrill, had expenses which exceeded the revenue from the businesses. Mr. Burrill instructed Ms. Sen to take $400,000 from Fund III to make-up the cash shortfall as an “advance on management fees.” It was the beginning of what turned out to be a series of similar acts that by late 2013 exceeded the amount of the fees that would have been owed by about $13 million. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Each was also barred from the securities business. Burrill Capital was censured. Respondents Burrill and Sen were denied the privilege of appearing and practicing before the Commission as accountants while Respondent Herbert was denied that privilege as an attorney. Respondents Burrill Capital and Burrill were directed to pay, jointly and severally, disgorgement of $4.6 million along with prejudgment interest and a $1 million penalty. Mr. Herbert was directed to pay a penalty of $185,000 while Ms. Sen will pay $90,000.
Investment fund fraud: SEC v. Caspersen, Civil Action No. 16-cv-2249 (S.D.N.Y. Filed March 29, 2016). Andrew Caspersen has been a managing principal at his firm, a registered broker dealer, since 2013. In 2015 he formed Irving Place III SPV and established a bank account for the firm. The name of his firm closely resembled that of a well established hedge fund, Irving Place Capital Partners III SPV. Mr. Caspersen’s firm had no assets, unlike Irving Place Capital Partners. In October 2015 Mr. Caspersen obtained a $25 million investment from a non-profit charitable affiliate of an investment limited partnership. To secure the investment he offered a promissory note that paid 15% annual interest on a quarterly basis. The note was redeemable in 90 days. It was secured by Irving Place III SPV and its supposed assets. The investor wired the funds to the bank account of the entity. Mr. Caspersen took control of the money and diverted it to his personal use. In March 2016 Mr. Caspersen solicited an additional $20 million investment from the same investor. He also approached a second investor, seeking a $50 million investment. Essentially the same misrepresentations used to obtain the first investment were employed. The first investor had become suspicious and requested that the note be redeemed. Neither investor furnished any money to Mr. Caspersen or his investment vehicle. The SEC’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23505 (March 29, 2016). A parallel criminal case was also filed.
Touting: SEC v. Smith, Civil Action No. 1:16-cv-00587 (D.C. Filed March 29, 2016) is an action which names as defendants Tobin Smith and his firm NBT Group, Inc. The Defendants entered into two agreements to tout the stock of IceWEB, Inc., a penny stock. In part the compensation agreements provided that if the shares had a sustained price increase additional compensation would be paid. The promotional materials falsely described the company and failed to fully disclose the compensation paid. The complaint alleged violations of Exchange Act Section 10(b) and Securities Act Section 17(b). Each defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint and to be barred from involvement in any future penny stock offerings. The defendants will also pay disgorgement of $165,900 and prejudgment interest. Mr. Smith will also pay a penalty of $75,000. See Lit. Rel. No. 23504 (March 29, 2016).
False statements: SEC v. AVEO Pharmaceuticals, Inc., Civil Action No. 1:16-cv-10607 (D. Mass. Filed March 29, 2016) is an action against the pharmaceutical company and its CEO, CFO and chief medical officer, respectively, Tuan Ha-Ngoc, David Johnston and William Slichenmyer. In 2012 the firm learned in meetings with the FDA staff that it would have to do additional clinical trials for a drug which showed promise for a particular type of deadly cancer but had a high death rate. While the firm began preparation for the trials it never conducted them. Rather, it continued in public communications to emphasize its data work while disclosing some of the information from the FDA. The firm conducted a public offering of securities. The depth of the FDA’s concerns were not disclosed until just prior to another meeting with the FDA staff in 2013. At that time the FDA put out a press release about the need for a second clinical trial. The firm’s stock price dropped significantly. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a). To resolve the action the company agreed to pay a $4 million penalty. The officers are litigating the action. See Lit. Rel. No. 23503 (March 29, 2016).
Breach of duty: In the Matter of Christopher M. Gibson, Adm. Proc. File No. 3-17184 (March 29, 2016) is an action which names as a Respondent the chief executive offer of Geier International Strategies Fund, LLC, a private pooled investment fund. In early 2011 Respondent caused the fund to invest virtually all of its assets in Tanzanian Royalty Exploration Corporation or TRX. Prior to liquidating a large portion of the holdings, Mr. Gibson sold all of the TRX shares in his personal accounts, front running the fund for a substantial profit. Later in the year he purchased a large block of TRX from the account of Investor A before again liquidating a large amount of the stock. This gave Investor a profit. Finally, toward the end of the year, and before liquidating another large block of TRX, Mr. Gibson’s sold put options – effectively selling short – and profited when the fund later sold its shares. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The proceeding will be set for hearing.
Unregistered broker: In the Matter of Linda Yoo, Adm. Proc. File No. 3-17182 (March 28, 2016). Respondent Yoo is an attorney. In connection with the sale of securities for an EB-5 program she solicited investors. The Order alleges violations of Exchange Act Section 15(a). Respondent resolved the proceeding, consenting to the entry of a cease and desist order based on the Section cited in the Order. In addition, Ms. Yoo will pay disgorgement of $205,000, prejudgment interest and a penalty of $50,000.
Investment fund fraud: SEC v. Rivera, Civil Action No. 3:16-cv-0136 (D.N.J. Filed March 24, 2016) is an action which names as defendants Daniel Rivera, Matthew Rivera and Robins Lane Properties Inc. which is controlled by the two brothers. Beginning in 2008 about $2.7 million was raised from 30 investors who were solicited to invest in a real estate venture. Many of the investors were elderly and unsophisticated. In fact the funds were used to repay other investors and diverted to the personal use of the individual defendants. The complaint alleges violations of Securities Act Sections 17(a) and Exchange Act Section 10(b). Defendants resolved the action, each consenting to the entry of an order enjoining them from future violations of the Sections cited in the complaint. Daniel Rivera was ordered to pay disgorgement and prejudgment interest of over $1.9 million and a civil penalty of $160,000. Matthew Rivera was directed to pay disgorgement and prejudgment interest of $20,013 and a civil penalty of $100,000. See Lit. Rel. No. 23505 (March 30, 2016).
Accounting enforcement: The European Securities and Markets Authority published its EU accounting enforcement 2015 report. The regulator reported on the results of its examinations of issuers and their compliance with International Financial Reporting Standards across 26 countries (here).