This Week In Securities Litigation (Week ending April 10, 2015)
The SEC filed another FCPA action, this time against the company that financed a “world tour” as part of the bribes paid by employees to secure business. Previously, the Commission filed an action against the employees. The SEC also filed four actions centered on offering frauds, a case centered on an investment fund fraud involving a professional athlete and one involving life settlements.
SEC Enforcement – Litigated Actions
Investment fund fraud: SEC v. Nadel, Civil Action No. 11-cv-0215 (E.D.N.Y.) is an action which names as defendants Warren Nadel, his broker-dealer, Warren D. Nadel & Co. and the related investment advisory firm, Registered Investment Advisors, LLC. The action centered on a claim that the defendants fraudulently induced clients to invest millions of dollars to generate over $8 million in commissions from 2007 to 2009 and that most of the transactions were cross-trades among advisory accounts. The Court granted the SEC’s motion for partial summary judgment, finding that defendants violated Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(3). A magistrate will determine the appropriate relief. See Lit. Rel. No. 23235 (April 8, 2015).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 6 civil injunctive actions and 2 administrative proceeding, excluding 12j and tag-along-actions.
Financial fraud: In the Matter of Molex Incorporated, Adm. Proc. File No. 3-16482 (April 9, 2015) is a proceeding which centers on a fraudulent, years long trading scheme in the firm’s Japan subsidiary. Since at least 1989 Katsuichi Fusamae, employed in that subsidiary, carried out a risky trading scheme in which he concealed losses and borrowed substantial sums which were also concealed. The losses totaled about $222 million. The scheme was not discovered until after Mr. Fusamae resigned in 2010 and sent the company a letter. In the settlement the Commission considered the remedial efforts of the company to improve its internal and other controls. The firm consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B).
Offering fraud: SEC v. Ecareer Holdings, Inc., Civil Action No. 15-80446 (S.D. Fla. Filed April 7, 2015) names as defendants the company, which purports to be in the on-line staffing business; eCareer, Inc., a wholly owned subsidiary; Joseph Azzata, CEO of eCareer Holdings; Dean Esposito, a director of eCareer who has been barred from participating in any penny stock offering in an SEC action; Joseph Devito also a director of eCareer who has been barred from participating in a penny stock offering; and Frederick Birks a sales agent of relief defendant Viper Asset Management, who has also been barred from participating in any penny stock offering. The action centers on what was essentially a boiler room operation to sell the shares of eCareer which were only supposed to be acquired by accredited investors. The defendants raised about $11 million, claiming that the firm would use the money for working capital without disclosing that much of it went to commissions and that other portions were diverted for personal expenses. The regulatory past of Messrs. Esposito, Devito and Birks also was not disclosed. Many of the purchasers were not accredited investors and were elderly. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) as well as Exchange Act Sections 10(b), 15(a) and control person liability Section 20(a). The case is pending.
Financial fraud: In the Matter of Airtouch Communications, Inc., Adm. Proc. File No. 3-16033 (April 9, 2015) is a previously filed action which named as Respondents the firm, Hideyuki Kanakubo, its founder and CEO, and Jerome Kaiser, CPA, and the former CFO. Previously the firm and Mr. Kanakubo settled. A detailed discussion of the action is here. Mr. Kaiser settled this week, consenting to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Section 10(b). He was also denied the privilege of appearing and practicing before the Commission as an accountant and directed to pay a penalty of $60,000. In addition, Mr. Kaiser must pay disgorgement of $15,000 within 365 days. If he fails to timely pay the disgorgement, interest will become immediately due.
Life settlements: SEC v. Pacific West Capital Group, Inc., Civil Action No. 2:15-cv-02563 (C.D. Cal. Filed April 7, 2015) is an action against the firm and its founder, Andrew B. Calhoun IV along with PWCG Trust and sales agents Brenda Barry and her firm BAK West, Andrew Calhoun Jr., Eric Cannon and his company Century Point, Michael Dotta and Caleb Moody. Pacific West and Andrew Calhoun IV market fractionalized interests in universal life insurance policies or so-called life settlements held by defendant PWCG Trust. The interests were unregistered securities. Since 2004 they have raised about $99.9 million from over 3,200 investors. In 2012 they began using funds from current sales to pay premiums on earlier policies where the reserve had been exhausted as those insured lived longer. Investors were not told about the use of their funds or the risks. The sales agents marketed the interests. The complaint alleges violations of Exchange Act Sections 10(b) and 15(a) and control person liability under 20(a) and Securities Act Sections 5(a), 5(c) and 17(a). See Lit. Rel. No. 23233 (April 7, 2015).
Investment fund fraud: SEC v. Capital Financial Partners, LLC, Civil Action No. 15-cv-11447 (D. Mass. Unsealed April 7, 2015) is an action naming as defendants the firm, and its founders and managers William Allen and Susan Daub. Beginning in July 2012, and continuing for the next three years, the defendants raised about $31.7 million from 40 investors who were told the funds would be used to make loans to professional athletes. Investors were given the opportunity to participate in specific loans. However, during the same period only about $18 million in loans were actually made while about $20 million was repaid to investors. Investor funds were used in part for the personal expenses of the individual defendants and to repay other investors. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The Court entered an asset freeze and other preliminary relief. The case is pending. See Lit. Rel. No. 23232 (April 7, 2015). See Lit. Rel. No. 23236 (April 9, 2015).
Manipulation: SEC v. 8000, Inc., Civil Action No. 12-civ-7261 (S.D.N.Y.) is a previously filed action against the company, Jonathan Bryant, the firm’s former CEO, and others. The complaint alleged a scheme to falsely inflate the firm’s shares from November 2009 through October 2010 and sell restricted shares into the market. The Court entered a final judgment against Mr. Bryant, enjoining him from future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). In addition, he was ordered to pay disgorgement of $2,969,525 and prejudgment interest. The order also imposes a director and officer bar and precludes him from participating in any offering of a penny stock. See Lit. Rel. No. 23234 (April 8, 2015).
Offering fraud: SEC v. Team Resources, Inc., Civil Action No. 3:15-cv-1045 (N.D. Tx. Filed April 6, 2015) is an action against Team Resources and Fossil Energy Corp, both controlled by defendant Kevin Boyles and the sales staff for the firms, Philip Dressner, Michael Eppy, Andrew Stitt and John Olivia. Over a five year period beginning in 2007 the two companies raised over $33 million from about 475 investors who purchased unregistered partnership interests in oil-and-gas ventures. The sales force, paid a commission although they were not brokers, cold-called potential investors and mislead them regarding past performance and how the offering proceeds would be used. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Team Resources, Fossil and Mr. Boyles settled, consenting to the entry of permanent injunctions enjoining them from future violations of each of the Sections cited in the complaint. They also agreed to pay disgorgement and penalties in amounts to be determined by the Court. Mr. Olivia settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a) and (c) and Exchange Act Section 15(a). Messrs. Boyles and Oliver consented to the entry of an administrative order barring them from the securities business and from participating in any penny stock offering. See Lit. Rel. No. 23230 (April 6, 2015).
Offering fraud: SEC v. GC Resources, LLC, Civil Action No. 3:15-cv-0104 (N.D. Tex. Filed April 6, 2015) is an action against the firm and Brian Polito, alleging fraud in connection with the sale of interest in oil properties. Specifically the defendants are alleged to have raised about $11.8 million, selling interests in a fake agreement with a well-known oil company that supposedly gave investors an interest in certain oil wells. The funds were used to make Ponzi type investor payments and the personal expenses of the defendant. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). A parallel criminal action was filed by the U.S. Attorney’s Office for the Northern District of Texas against Mr. Polito. The Commission’s action is pending. See Lit. Rel. No. 23231 (April 6, 2015).
Offering fraud: SEC v. Janus Spectrum LLC (D. Ariz. Filed April 6, 2015). The action was brought against two groups: 1) The Janus Spectrum defendants which include the company; David Alcorn, a founder and managing director; and Kent Maerki, a founder and former owner of the company; and 2) the fundraising entity defendants which included four individuals – Daryl Bank, Bobby Jones, Terry Johnson and Raymond Chadwick – and eleven entities variously controlled by and/or affiliated with these four individuals. At the center of the action is a 2004 FCC plan to reconfigure the 800 MHz portion or band of the wireless spectrum under which a portion of the band called Expansion Band or Guard Band could not be used by the wireless carriers. Janus Spectrum provided services to over 20 fundraising entities in the preparation of FCC license applications, including those who are defendants here, and encouraged investors to participate with the fundraising entities. In making those referrals Janus Spectrum and Messrs. Alcorn and Maerki told investors that the spectrum in the Expansion Band and Guard Band could be used by major wireless carriers. The fund raising defendants offered investors the opportunity to purchase an interest in one of the firms or to become members in an association. Overall the fundraising defendants brought in over $12.4 million from investors between May 2012 and October 2014. About half of those funds went through Janus Spectrum. A small portion of those funds were used to prepare applications for FCC use. Significant portions were kept by Messrs. Alcorn and Maerki with other portions going to the four individuals tied to the fundraising entities. The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending.
In the Matter of Flir Systems, Inc., Adm. Proc. File No. 3-16478 (April 8, 2015). Flir develops infrared technology for use in imaging and other sensing product and systems and night vision and camera systems for government and commercial use. The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 30A based payments for travel, gifts and entertainment to officials in Saudi Arabia to obtain and retain business. The travel included what the Order calls a “world tour” and expensive gifts which are described in an action previously brought against two employees here. As a result the firm earned $7 million in profits. The improper conduct was discovered when the firm received a complaint letter from a third party agent and launched an investigation which uncovered it. The firm took significant remedial efforts after self-reporting. To resolve the proceeding the company consented to the entry of a cease and desist order based on the Sections cited in the Order. Flir will also pay disgorgement of $7,534,000, prejudgment interest and a civil penalty of $1 million. In addition, the firm is required to report to the staff in at least nine month intervals over a two year term, submit a written report on its remediation efforts, update those efforts to reflect the comments of the staff and file an additional report after 270 days on those efforts.