This Week In Securities Litigation (Week ending August 4, 2017)
In one of the few FCPA cases tried to verdict before a jury, NG Lap Seng, Chairman of Sun Kan lp Group was convicted. The case centered on bribing two UN ambassadors in connection with the Macau Conference Center project.
The Commission brought a series of enforcement actions this week including one in which federal employees were fraudulently induced to roll over retirement accounts into higher priced vehicles and another in which investors were induced to purchase shares of two entities supposedly developing cancer related products but later changed their business purpose to operating restaurants. The agency also brought actions centered on market manipulation, undisclosed conflicts and fees by investment advisers, an offering fraud, and a failure to file SARs.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 8 administrative proceedings, excluding 12j and tag-along proceedings.
Unregistered broker: In the Matter of Alfred C. Teran, Adm. Proc. No. 3-18098 (August 3, 2017). Respondent previously worked for several firms in investor relations. Between 2011 and 2015 he participated in the offer and sale of securities to hundreds of investors in connection with unregistered offerings organized by Chris Faulkner, a defendant in an offering fraud action brought by the Commission which is currently pending. SEC v. Faulkner, Civil Action No. 3:16-cv-01735 (N.D. Tex). In that role Mr. Teran furnished substantive details regarding the offerings to prospective investors. He was paid about $1.6 million in undisclosed transaction-based compensation. He is not registered with the Commission as a broker. The proceeding will be set for hearing. The Order alleges violations of Exchange Act Section 15(a).
Manipulation: In the Matter of Joe Yiu Cheung, Adm. Proc. File No. 3-18093 (August 2, 2017) is an action which names as a Respondent Mr. Cheung, the undisclosed beneficial owner of United American Petroleum Corporation, a firm nominally engaged in the oil business. Since about May 2007 Mr. Cheung has beneficially owned greater than 10% of the shares of United American. At times he was also an undisclosed control person. Between January and July 2012 Mr. Cheung financed a promotional campaign related to the firm which made false statements through email blasts. The stock price rose from about $0.35 per share to a high of $1.49. As the stock price rose he dumped his shares. The Order alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b), 13(d) and 16(a). To resolve the case Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to the entry of an officer and director bar and a penny stock bar. In addition, Mr. Cheung will pay disgorgement of $542,498.33, prejudgment interest and a penalty of $150,000.
Manipulation: SEC v. Genovese, Civil Action No. 1:17-cv-05821 (S.D.N.Y. Filed Aug. 1, 2017) is an action which names as defendants Robert Genovese and his hedge fund, B.G. Capital Group, Ltd. along with Abraham Mirman, the former head of investment banking at now defunct brokerage firm John Thomas Financial, Inc. The complaint alleges that beginning in the summer of 2012 Mr. Genovese and BG Capital, with the assistance of Defendant Mirman and Tommy Belesis, then the president and owner of John Thomas, manipulated the shares of Liberty Silver, Inc., a penny stock then traded on the TSX exchange in Toronto and the OTC BB in the U.S. Mr. Genovese offered to pay the two former brokerage firm officials a kickback of 50% of his trading profits, according to the complaint. The manipulation is alleged to have involved a series of false statements by Mr. Genovese and his firm, the use of newsletter writers to tout the stock and manipulative and deceptive trading as the stock price rose in September and early October in advance of an SEC trading halt. Overall Mr. Genovese and his firm are alleged to have sold nearly 13 million shares of stock for proceeds of over $17.5 million as the stock price rose from about $0.70 in August to $1.43 on September 27, 2012. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 9(a) and 10(b). The case is pending. See Lit. Rel. No. 23895 (August 2, 2017). See also In the Matter of Anastasios P. “Tommy” Belesis, Adm. Proc. File No. 3-18088 (August 1, 2017)(settlement of the former owner of John Thomas alleged to have been involved in the alleged manipulation; consented to cease and desist order based on each of the Sections cited above except Exchange Act Section 9(a), a bar from the securities business and a penny stock bar; payment of $434,628.40 in disgorgement, prejudgment interest and a penalty equal to the amount of the disgorgement).
Undisclosed fees: In the Matter of Cadaret, Grant & Co. Inc., Adm. Proc. File No. 3-18087 (August 1, 2017). The firm is a registered broker-dealer and investment adviser. First, from 2011 through 2016 the firm invested certain clients in mutual fund shares that carried 12b-1 fees despite the fact that the client returns were reduced and other institutional shares were available for which the fees are not paid. Second, during the same five year period the adviser also received payments from two mutual fund complexes. The fees were to support the marketing and distribution of those funds’ shares to advisory clients. The amount of the fees depended on the size of the investment. These fees were separate and apart from the 12b-1 fees and not disclosed. Third the Form ADV stated that the firm would secure best execution for its clients. By placing clients in fund shares that carried the 12b-1 fees rather than institutional shares, it failed to comply with this representation. Finally, the firm failed to refund certain prepaid advisory fees. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and 207. To resolve the matter Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay disgorgement of $3,048,000 to compensate advisory clients impacted by the conduct detailed in the Order, additional disgorgement of $2,591,000 and prejudgment interest and a penalty of $280,000.
Offering fraud: SEC v. Muraca, Civil Action 1:17-cv-11400 (D. Mass. Filed July 31, 2017). Named as defendants in the action are: Patrick Muraca, Nanomoleculardx, LLC and Metaborx, LLC. Mr. Murca is the CEO of both firms. Mr. Murca began soliciting funds for his two firms – Nano and Meta – in April 2016 and has continued through the end of June 2017. The website for Nano claimed the firm is focused on the development of IVD and RUO diagnostic assays and kits for the early detection and monitoring of biomarkers in oncology and endocrinology. Metabo’s website claimed it was building novel therapies for cancer and metabolic disease. Mr. Murca described the firms as companions – Meta is the pharmaceutical company while Nano is developing the diagnostic test. Mr. Murca sent investors a stream of communications stating that investor funds would be used to develop the firms. None of the updates told investors that filings were made with state authorities to register each firm as a foreign LLC with the purpose of operating a restaurant. Mr. Muraca and his firms raised about $1,175,000 from fifteen investors. Mr. Muraca misappropriated much of the investor money. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The Manhattan U.S. Attorney’s Office filed a parallel criminal action. See Lit. Rel. No. 23893 (August 1, 2017).
Fraudulent reinvestment: SEC v. v. Keystone Capital Partners Inc., Civil Action No. 1:17-cv-99999 (N.D. Ga. Filed July 31, 2017) is an action which names as defendants: The firm, which does business as Federal Employee Counselors, and was co-founded by defendants Christopher Laws and Jonathan Cooke; Danny Hood; and Brandon Long. All of the individuals were registered representatives. Over a two year period, beginning in early 2012, the defendants induced federal employees to roll over funds from their federal retirement accounts to variable annuity products promoted by Keystone. The reason was higher commissions. To induce the federal employees to transfer their funds, defendants created the impression that the new investment program was approved or reviewed by the federal government. Written materials, devised by the defendants shrouded the fact that the investments were actually variable annuities offered by a private insurance firm, were used to solicit investors. While there were supposedly additional features with the new investments, investors were not informed about the added costs About 200 variable annuities with a face value of $40 million were sold. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a). The case is pending.
MAL: In the Matter of Windsor Street Capital, Adm. Proc. File No. 3-17813 (July 28, 2017) is a previously filed action against Respondent broker-dealer. The Order alleges that over a ten month period beginning in January 2014 the firm sold hundreds of millions of shares of stock issued by four firms on behalf of two customers. None of the stock was registered. The two customers represented to the broker that the shares were exempt from registration under Section 5 of the Securities Act, citing Rule 144, and made representations which, if true, would support that claim. No due diligence was done by the firm. If done that work would have cast doubt on the claims. While Meyers Associates has a written AML program to facilitate compliance with those rules and identify red flags, the firm failed to follow it. Rather, the broker accepted large quantities of certificated penny stock shares for deposit which were then liquidated and the money transferred out – a red flag under the AML program. The firm failed to file SARs. The Order alleged Exchange Act Section 17(a) and Rule 17a-8 by failing to file SARs when appropriate. Myers Associates failed to investigate these transactions. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 17(a). In resolving the case the firm agreed to a series of undertakings. Those include agreeing not to accept the deposit of stocks valued under $5.00 and to retain an independent consultant. The firm also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. Meyers Associates will pay a penalty of $200,000. The COO previously settled with the Commission.
Manipulation: SEC v. Martin, Civil Action No. 6:17-cv-01385 (M.D. Fla. Filed July 27, 2017) is an action which names as defendants: Jeffrey Martin, the largest shareholder of Mainstream Entertainment, Inc. and a former registered representative; Thomas Tedrow, a shareholder of Mainstream and an undisclosed control person of First Power & Light LLC n/k/a Volt Solar Systems LLC and a convicted securities felon; Christian Tedrow, the son of Thomas; Tyler Tedrow, another son of Thomas; Beaufort Capital, a shareholder of Mainstream; and Robert Marino who effected the purchase and sale of Beaufort Capital’s Mainstream shares. Jeffrey Martin and Thomas Tedrow are alleged to have orchestrated a scheme to sell the restricted common shares of Mainstream, a shell company that had been created and brought public by Mr. Martin. Thomas Tedrow then introduced Mr. Martin to the undisclosed control person of Volt. A change of control transaction was arranged between the two entities. Mr. Martin and Thomas Tedrow then undertook a pump and dump scheme during which the restricted shares were sold in the open market through the use of false Commission filings and press releases. The other defendants sold unregistered shares into the market. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Sections 9(a)(1), 10(b), 13(a), 13(b)(2)(A).13(b)(5), 13(d), 16(a), 15(d), 20(a) and 20(b). The action is pending. See Lit. Rel. No. 23892 (August 1, 2017); See also SEC v. Swart, Civil Action No. 6:17-01386 (M.D. Fla. Filed July 27, 2017)(names as defendants Harold Swart and Swart Baumruk & Co., LLP; defendants performed accounting services for Mainstream and were involved with its Commission filings; they demanded shares in Mainstream in return for a debt; defendants settled the charges, consenting to the entry of an order directing they comply with a prior order prohibiting them from appearing and practicing before the Commission as accountants; they were also ordered to pay, respectively, disgorgement and prejudgment interest of $47,436.63 and $21,622.61; permanently enjoined from future violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 10(b) and agreed to the entry of a penny stock bar and to pay a penalty of $41,945.56) as to Mr. Swart); In the Matter of Sterling Craig Barton, Adm. Proc. File No. 3018986 (July 31, 2017) (participated in the change of control transaction; consented to the entry of a cease and desist order based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5) and 15(d) and a penny stock bar; and directed to pay disgorgement of $16,014.23, prejudgment interest and a penalty of $100,000); In the Matter of Karen F. Aalders, Adm. Proc. File No. 3-198085 (July 31, 2017)(alleged to have acted as a nominee officer and director of Mainstream, forged a series of documents and made misrepresentations to auditors; consented to the entry of a cease and desist order based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 101(b), 13(a), 13(b)(2)(A), 13(b)(5), 15(d) and 16(a) and the entry of an officer director bar and penny stock bar; no penalty based on financial condition).
Undisclosed conflicts: In the Matter of Columbia River Advisors, LLC, Adm. Proc. File No. 3-18084 (July 28, 2017) is a proceeding which names as Respondents: The registered investment adviser; Benjamin Addink, a co-founder of the firm and its CFO and a portfolio manager; and Donald Foy, also a co-founder of the firm and its CEO and compliance officer. The adviser managed two funds, one established to trade foreign currencies and the other to loan funds to the adviser for expansion. Respondents had the foreign currency fund invest in the loan fund without disclosing the conflict. An auditor was also retained who was not qualified under the Advisers Act Custody Rule. As a result audited financial statements were not distributed in a timely fashion as required by the Custody Rule. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings Columbia River consented to the entry of a cease and desist order based on the Sections cited in the Order as did Respondent Foy. Respondent Addink also consented to the entry of a cease and desist order but only based on Section 206(2). Each Respondent was censured. The adviser will pay a penalty of $80,000 while Mr. Addink will pay $25,000 and Mr. Foy $30,000.
FCPA – Anti-corruption
U.S. v. Ashe, No. 1:15-cr-00706 (S.D.N.Y.) is an action in which NG Lap Seng, chairman of the Sun Kian lp Group, was convicted after a four week trial of conspiracy to commit bribery and to violate the FCPA, one count of paying bribes and gratuities, two counts of violating the FCPA and one count of money laundering. The charges are based on a conspiracy to pay bribes to Francis Lorenzo, a former UN Ambassador from the Dominican Republic, and John Ashe, the late former Permanent Representative of Antigua and Barbuda to the UN and the 68th President of the UN General Assembly. Others have previously pleaded guilty. Bribes were paid to Ambassadors Ashe and Lorenzo to induce them to use their official positions to advance Defendant’s interest in obtaining formal UN support for the Macau Conference Center. One of the actions the Ambassadors agreed to and did was to submit an official document to the then-UN Secretary-General in support of the Macau Conference Center. Five other defendants have been charged in this action. Co-conspirators Lorenzo, Yin and Hedi Hong Piao have pleaded guilty and are awaiting sentencing; Shiwei Yan has pleaded guilty and was sentenced to serve 20 months in prison. Co-defendant Ashe passed away in 2016. Charges against him were dismissed.
Misappropriation: U.S. v. Galanis, No. 1:16-mj-02978 (S.D.N.Y.) is an action which named as a defendant, among others, Gary Hirst, the former chairman of Gerova Financial Group, Ltd., a NYSE listed firm. Mr. Hirst was sentenced to serve 78 months in prison for defrauding the shareholders of the firm by secretly giving away nearly $72 million of company stock to himself and his co-conspirators. As part of the scheme Mr. Hirst and Jason Galanis obtained sufficient control over the company to execute their plan. After obtaining control they back-dated documents to conceal the theft of stock. The shares were then deposited in brokerage accounts controlled by a co-conspirator. Mr. Hirst and his co-conspirators reaped nearly $20 million in profits. About $2.6 million went to Mr. Hirst. In addition to the prison term, Mr. Hirst was sentenced to 1 year of supervised release and ordered to forfeit about $19,038,650.53. He was convicted after a two week trial. Previously, Jason Galanis and three others pleaded guilty to charges of conspiracy to commit securities fraud, securities fraud, and investment adviser fraud.
Customer protection rule: In the Matter of PricewaterhouseCoopers LLP, PCAOB Release No. 105-2017-032 (August 2, 2017) is a proceeding against the audit firm stemming from its audit work for Merrill Lynch, Pierce, Fenner & Smith in 2014. Specifically, Merrill held tens of billions of dollars of its customers’ securities in certain accounts with third-party institutions that were subject to liens by the third parties. The Customer Protection Rule, Rule 15c3-3, requires that broker-dealers such as Merrill hold certain customer securities in a segregated account free of liens. As Merrill’s auditor, PwC was required to obtain sufficient appropriate evidence to support its opinion about whether Merrill’s internal controls regarding the Customer Protection Rules were effective during the period. The firm failed to obtain that evidence. According, the firm was censured and ordered to pay a penalty of $1 million by the Board.
Disclosure: The Securities and Futures Commission publicly censured China Life Insurance (Overseas) for violations of the Takeovers Code. Specifically, on March 4, 2015 an offer period commenced for Glorious Property when it announced a possible privatization by the firm’s controlling shareholder, Best Era International Limited. During the period May 9 to August 8, 2016 China Life executed 2,139 trades in Glorious Property’s shares without making the proper disclosures as required by the Takeover Code. China Life accepts that it failed to comply with the Code, consented to the disciplinary action and is taking remedial steps.
Private funds: The SFC issued a circular discussing concerns regarding the management of private funds and discretionary accounts. The regulator concluded that a number of private funds and discretionary accounts with concentrated, illiquid and interconnected investments have irregular features (here).