This Week In Securities Litigation (Week ending April 13, 2017)
In a holiday shortened week the Commission began preparation for argument before the Supreme Court in an action which could have a significant impact on its enforcement program. The question for resolution is whether the statute of limitations in Section 2462 of 28 U.S.C. applies to claims for “disgorgement.” Kokesh v. SEC, No. 16-529. An adverse ruling could limit the Commission’s ability to seek one of its most frequently used remedies. Argument is scheduled for next Tuesday, April 18, 2017 at 10:00 a.m.
The regulator brought thirteen cases this week, charging 27 persons with touting and/or other related violations. The cases were filed as a group on Tuesday, emphasizing the Commission’s focus on the question. While 17 of those charged agreed to settle, 10 others are litigating the cases.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 2 civil injunctive cases and 11 administrative proceedings, excluding 12j and tag-along proceedings.
Touting: In the Matter of Manish Singh and Lavos, LLC, Adm. Proc. File No. 3-17920 (April 10, 2017). This is one of thirteen similar actions brought by the Commission centered on touting. Twenty-seven persons were charged. Generally, the SEC claimed that those charged paid others to write articles promoting the issuer in articles which presented the material as unbiased market reports without disclosing that the author had been paid in violation of Securities Act Section 17(b). Seventeen of those charged agreed to settlements which include disgorgement or penalties ranging from $2,200 to nearly $3 million. Ten others charged are litigating with the Commission. In this action, which typifies the others, Mr. Singh was the President and CEO of ImmunoCellular Therapeutics, Ltd., for a time and then the CEO of Lion Biotechnologies, Inc. He also controlled Respondent Lavos, LLC for a period. That firm provided promotional services to issuers, including publishing articles. The Order charged Mr. Singh with being a paid stock-tauter for twelve issuers, frequently using his firm. None of the publications involved disclosed his compensation which totaled at least $1.75 million in cash and equity. The Order alleges violations of Exchange Act Section 10(b) and Securities Act Sections 5(b)(1), 17(a) and (b). To resolve the matter Respondent Singh agreed to implement certain undertakings. In addition, each Respondent consented to the entry of a cease and desist order based the Sections cited in the Order. Mr. Singh was also barred from participating in any penny stock offering with a right to apply for reentry after five years and from serving as an officer or director of an issuer for five years. He will pay disgorgement of $1,750,000, prejudgment interest and a penalty of $1 million. See also In the Matter of Cytrx Corporation, Adm. Proc. File No. 3-17919 (April 10, 2017). (Biopharmaceutical company is alleged to have violated the prospectus requirements through, among other things, the circulation of articles it largely wrote about the firm while it was in registration; settled with a cease and desist order based on Securities Act Section 5(b)(1), undertakings and a penalty of $75,000); In the Matter of Michael A. McCarthy, The DreamTeam Group, LLC, Mission Investor Relations, LLC and Qualitystocks LLC, Adm. Proc. File No. 3-17917 (April 10, 2017)(articles touting the company written as if by independent third party but paid for by firm without disclosure in violation of Securities Act Sections 17(a)(2) and (3) and 17(b); resolved with a cease and desist order based on cited Sections, disgorgement and a penalty). See Lit. Rel. No. 23802 (April 12, 2017).
Offering fraud: U.S. v. Seitz, No. 1:16-cr-98 (E.D. Va.) is an action in which defendant Gregg Seitz pleaded guilty to one count of conspiracy to commit wire fraud. The charge was based on two schemes conducted by Mr. Seitz. In one he solicited investors to invest in real estate – a house flipping venture through which he claimed to be making substantial sums. In the other he claimed to have a lucrative contract with the Department of Homeland Security for software. Neither scheme existed; the money was either used to make Ponzi type payments or misappropriated.
Insider trading: U.S. v. Davis, No. 1:16-cr-00338 (S.D.N.Y. Verdict April 7, 2017). Defendant William “Billy” Walters, a well known Las Vegas gambler, was found guilty by a New York jury on two counts of conspiracy, four counts of securities fraud and four counts of wire fraud. Defendant Thomas Davis was a director of Dean Foods Company and a member of the audit committee. He was also a member of a group of shareholders of Darden Restaurants, Inc. trying to institute change at the company. Mr. Davis pleaded guilty and has been cooperating with the government. From 2008 through 2012 Mr. Davis repeatedly tipped his friend William Walters in advance of certain corporate events related to Dean Foods, according to court papers. Mr. Davis also tipped his friend in advance of the spin-off of a profitable Dean Foods subsidiary, The WhiteWave Foods Company. In addition, the director provided Mr. Walter, in 2013, with information he obtained on a confidential basis from a group of investors seeking to institute corporate change at Darden. As he was tipped Mr. Walters traded profitably, netting him at least $40 million in profits. In exchange for the inside information Mr. Walters aided Mr. Davis with his financial difficulties, furnishing him with almost $1 million. Sentencing for Mr. Walters is scheduled for July 14, 2017. The SEC’s parallel case is pending. SEC v. Walters, Civil Action No. 1:16-cv-03722 (S.D.N.Y. Filed May 19, 2016).
Corruption: The Court ordered that Trevor Flugge, the former chairman of AWB Limited, pay a penalty of $50,000 and be disqualified from managing corporations for a period of five years. The order is based on findings that he breached his duties as a director by failing to stop the firm from making improper payments to the Government of Iraq in connection with providing humanitarian aid to the country during the U.N. embargo. The action is tied to the Commission of Inquiry known as the Cole inquiry established in 2005 to enquire into matters relating to AWB supplying wheat to Iraq under the U.N. program permitting humanitarian aid. In his final report Commissioner Cole made certain adverse findings as to AWB and recommended that the Australian Securities and Investment Commission, among others, investigate.
AML: The Securities and Futures Commission fined STAR International Futures Co. Ltd. $3 million in connection with a failure to comply with anti-money laundering regulatory requirements. Those requirements specify that the firm take all reasonable measures to ensure that proper safeguards exist to guard against the risks of money laundering and terrorist financing associated with third party fund transfers. Here between, January and July 2014, the firm failed to comply with its obligation by: not obtaining proper written instructions from clients and verifying the identity of their parties; not making sufficient enquiries regarding third party deposits and maintaining the proper records; ensuring that the approval process for third party deposits was effective; providing adequate training for its staff; and installing an appropriate and effective compliance function. In assessing the penalty the regulator considered the remedial acts of the firm and its cooperation.
Market abuse: The Market Misconduct Tribunal dismissed charges brought by the Securities and Futures Commission against five former executive directors of CITIC Limited arising out of an incident on September 12, 2008. At that time the directors were alleged to have put out false and misleading information about the firm’s financial position which caused its share price to be artificial, thereby injuring shareholders. The SFC was seeking to compensate the injured shareholders.