This Week In Securities Litigation (Week ending Dec. 18, 2015)
The Commission closed out the week before the holidays with a joint press conference with the Manhattan U.S. Attorney. The U.S. Attorney and the Director of Enforcement announced actions against former hedge fund manager and pharmaceutical company founder Martin Shkreli. The action charged him with a series of fraudulent acts including misappropriating investor funds and having the pharmaceutical company issue stock and pay cash to disgruntled fund investors.
The SEC also brought cases centered on offering frauds, market manipulation and conflicts. Two settled actions involved cooperation agreements with former employees of a firm that engaged in a financial fraud.
Remarks: David Grim, Director, Division of Investment Management, addressed the ICI 2015 Securities Law Development Conference, Washington, D.C. (December 16, 2015). He reviewed 2016 rule making initiatives for the Division (here).
Rules: The SEC proposed new derivatives rules for registered funds and business development companies. The new rule is designed to enhance the regulation derivatives for use by investment companies, ETFs, close-ended funds and business development companies (here).
Rules: The SEC proposed rules for resource extraction issuers under Dodd-Frank. The rules are designed to promote greater transparency about payments related to resource extraction (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 8 civil injunctive cases and 3 administrative proceeding, excluding 12j and tag-along proceedings.
Misappropriation: SEC v. Shkreli, Civil Action No. 15-cv-07175 (S.D.N.Y. Filed December 17, 2015) is an action naming as defendants Martin Shkreli, Evan Greebel, MSMB Capital Management LLC and MSMB Healthcare Management LLC. Mr. Shkreli was the managing partner and portfolio manager for MSMB and MSBM Healthcare and the managing member of MSB Adviser and MSB Healthcare adviser. He is also the founder of Retrophin LLC, a publically traded pharmaceuticals company. Mr. Greebel was outside counsel to Retrophin. The complaint alleges that Mr. Shkreli, through, MSMB Adviser or MSMB Healthcare Adviser, misappropriated investor funds from MSMB, made material misrepresentations to investors, sold short over 32 million shares of a company in MSMB’s account and represented to the executing broker that MSMB had located sources from which to borrow the shares. He also is alleged to have misappropriated about $900,000 from MSMB Healthcare to fund the settlement of an arbitration with a broker. Mr. Greebel assisted Mr. Shkreli with fraudulently inducing Retrophin to issue stock and make cash payments to disgruntled investors of the hedge funds. The complaint alleges violations of Securities Act Sections 17(a)(1) and (2), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. A parallel criminal action was filed by the U.S. Attorney’s Office. See Lit. Rel. No. 23433 (December 17, 2015).
Misrepresentations: In the Matter of Owen Li, Adm. Proc. File No. 3-17005 (Filed December 16, 2015). Mr. Li is the majority owner of Respondent Canarisic Capital, LLC, an exempt reporting adviser 70% owned by Mr. Li. Canarsi was the adviser for Canarsi Capital Fund Master, LP, Canarsi Capital Fund, LP, an onshore fund, and Canarsi Capital Fund Offshore, Ltd. The onshore fund launched in 2013 with ten investors and $16.55 million. It ended the year with a return of 69% and about $47.7 million in AUM. Mr. Li induced investors to entrust their money to the fund with a series of misrepresentations regarding the risk involved and the investor protections. As his trading became more risky he made misrepresentations to both prime brokers to conceal positions and minimize margin. Nevertheless, the fund floundered. Finally, in January 2015 Mr. Li sent a letter to all investors noting that he had directed “a series of transactions over the last several weeks that resulted in the loss of all but two hundred thousand dollars of the Fund’s capital.” The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Respondents resolved the charges, consenting to the entry of a cease and desist order based on the Sections cited in the Order. The firm also consented to the entry of a censure and Mr. Li was barred from the securities business. Respondents will, on a joint and several basis, pay disgorgement of $3,379,134 and prejudgment interest. Payment will be satisfied by a restitution order entered in U.S. v. Li, an action in which Mr. Lei pleaded guilty. The settlement was entered by consent with an admission to the jurisdiction of the SEC but does not specify that it is on the basis of neither admitting nor denying or that it is based on admissions.
Auditing: SEC v. Lee, Civil Action No. 12-cv-8167 (S.D.N.Y. ) is a previously filed action against Kevin Donovan, Lee Cole, Linden Boyne, all former officials at Electronic Game Card Inc. who have settled, and Timothy Quintanilla who was the engagement partner of the outside auditors. The complaint alleged in part that Mr. Quintanilla and his team issued false audit opinions since the financial statements were not in accord with GAAP. A final judgment of permanent injunction was entered against him based on the antifraud provisions. He was also directed to pay a civil penalty of $100,000. This concluded the action. See Lit. Rel. No. 23431 (December 16, 2015).
Offering fraud: SEC v. Le, Civil Action No. 15-cv-04366 (D. Minn. Filed December 15, 2015) is an action naming as defendants Vu Le and his controlled firm TeamVinh.comLLC. The complaint alleges that the defendants raised over $ 3 million from about 5,600 investors through three fraudulent offerings. One involved a pyramid scheme, a second investment contacts while the third involved commodities. None of the schemes were legitimate. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 20(a). The case is pending. See Lit. Rel. No. 23432 (December 17, 2015).
Manipulation: SEC v. DelPresto (D.N.J. Filed December 15, 2015) is an action against Mr. DelPresto who previously pleaded guilty to conspiracy to commit securities fraud, and his controlled company, MLF Group, LLC. The complaint alleges a manipulation involving four stocks using essentially the same approach. In each case the defendants procured a shell company, conducted a reverse merger and used a series of controlled accounts to engage in a manipulation centered on paid promotions designed to push the price of the stock up. In each case the defendant recruited a market maker at a broker-dealer and a person employed by an investment adviser to facilitate the scheme. Those persons were compensated with kickbacks. Overall the schemes generated $13 million in illicit profits. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). A parallel criminal action was brought by the U.S. Attorney’s Office.
Conflicts: SEC v. Atlantic Asset Management, LLC (S.D.N.Y. Filed December 15, 2015). Atlantic Asset, previously known as Hughes Capital Management, LLC, has been a registered investment adviser since 1993. Hughes changed its name to Atlantic in 2015 after it merged with another adviser. The firm is a wholly-owned subsidiary of GMT Duncan LLC. BFG Socially Responsible Investments Ltd. holds a significant interest in GMT, acquired in 2014. In two instances BFG caused Atlantic Asset to purchase Tribal bonds which were of dubious quality. Total purchases were over $40 million. In each instance investors protested to no avail. The purchase in each instance benefited BFG and/or its parent. Those benefits were not disclosed. Indeed, in 2014 and 2015 in its Forms ADV the adviser did not disclose the interest of BFG. Yet the firm had the right under certain agreements to select one member of GMT’s board of directors and the CIO for that firm and Hughes. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. The case is pending.
Undisclosed compensation: In the Matter of Total Wealth Management, Inc., Adm. Proc. File No. 3-15842 (December 14, 2015) names as respondents the registered adviser and its principals, Jacob Cooper, Nathan McNamee and Douglas Shoemaker. The Order alleges that beginning in 2009 the adviser and Mr. Cooper, with substantial assistance from Messrs. McNamee and Shoemaker, engaged in a fraudulent scheme to collect and conceal undisclosed revenue sharing fees from investments they recommended to their clients. The revenue was channeled through entities created to mask the receipt of the fees. The adviser also violated the custody rule by failing to obtain annual audits from a PCAOB registered audit firm. A receiver was appointed to take charge of the adviser in SEC v. Total Wealth Management (S.D. Cal.). The Order alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. Messrs. McNamee and Shoemaker consented to the entry of cease and desist orders based on the Sections cited in the Order. Each is barred from the securities business with the right to apply for reentry after 5 years. Mr. McNamee will pay $103,966 in disgorgement, prejudgment interest and a penalty of $307,000; Mr. Shoemaker will pay disgorgement of $128,180, prejudgment interest and a penalty of $300,000.
Offering fraud: SEC v. CAUSwave, Inc., Civil Action No. 4:15-cv-00197 (E.D.N.C. Filed December 14, 2015 is an action against the firm, Jeffrey Riggs and Diane Baldwin alleging an offering fraud. Specifically, the complaint alleges that beginning in 2009 and continuing to the present, the defendants raised over $6 million by soliciting investors with claims that the company was about to receive substantial funds from institutional investors. In fact the claims were false. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23427 (December 15, 2015).
Cooperation: In the Matter of Michael McKenna, CPA, Adm. Proc. File No. 3-17002 (December 14, 2015); In the Matter of Charles Loveless, CPA, Adm. Proc. File No. 3-17001 (December 14, 2015). Mr. McKenna was the vice president of Global Finance at Diebold Inc. from 2002 through 2005. Mr. Loveless was a finance manager at the firm from 2001 to 2006. The financial fraud at Diebold, Inc. began in 2002 and culminated in a $127 million 2008 restatement. Prior to the restatement the financial fraud resulted in over forty misstated annual, quarterly, and other reports being filed with the Commission, along with dozens of inaccurate press releases. Each participated in the fraud. SEC v. Diebold, Inc., Civil Action No. 1:10-CV00908 (D.D.C. Filed June 2, 2010). Each order noted that the Respondent cooperated with the agency and alleged violations of Exchange Act Section 13(b)(2)(A). In resolving the proceedings, each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. Each paid disgorgement with Mr. McKenna paying $42,700 while Mr. Loveless will pay $7,724.
Manipulation: SEC v. Hand, Civil Action No. 1:15-CV-14109 (D. Mass. Filed December 11, 2015) is an action against Mr. Hand and Antonio Katz. The two men, along with others, secured the issuance of million of shares of a firm named Greenway Technology through the use of convertible promissory notes, then sent false documents from Attorney Hand or someone who worked for him to brokerage and other firms to facilitate the issuance, deposit and ultimately the sale of the stock. A promotional campaign was designed to push up the share price. The scheme yielded $850,000 in illicit profits. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 10(b). A parallel criminal action was filed by the U.S. Attorney’s Office. See Lit. Rel. No. 23424 (December 11, 2015).
Offering fraud: SEC v. Oxford City Football Club, Inc., Civil Action No. 15-62584 (S.D. Fla. Filed Dec. 10, 2015). Defendant Thomas Guerriero controlled the defendant company, formed from a reverse merger. It owned interests in English football clubs as well as other sports teams, all of which made marginal amounts of profit. The company also claimed to be engaged in other lines of business. By the end of its first full year of operation Oxford reported just over $600,000 of revenue and a net loss of over $7 million. In 18 months over 150 investors bought shares for a total of $6.5 million. Investors were told that they could purchase shares at a deep discount to market. They were not told that the market price was manipulated. While the firm was real, the sales pitch used to sell its shares was fraudulent, geared to the unsophisticated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a). It also alleges violations of Exchange Act Sections 10(b) and each subsection of Rule 10(b)-(5), and 20(b). The case is pending.
Misappropriation: SEC v. Seibert, Civil Action No. 2:15-cv-09331 (C.D. Cal. Filed December 2, 2015) is an action naming as a defendant Robert Seibert, a securities law recidivist. Defendant, and those working for a firm he controlled, cold called elderly investors and encouraged them to purchase a variety of stocks quoted on the “OTC Link.” Overall he raised about $531,000 from 41 people in several states. Mr. Seibert misappropriated the funds. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 15(a) and 20(a). The case is in litigation. See Lit. Rel. No. 23425 (December 11, 2015).
Rules: The Board adopted rules requiring disclosure of the engagement partner and other accounting firm participation in an audit (here).
Investment fund fraud: U.S. v. Trebitsch (S.D.N.Y.) is an action in which Marcello Trebitsch previously pleaded guilty. This week he was sentenced to serve two years in prison. The charges were based on the operation of a Ponzi scheme in which four investors were defrauded out of about $6 million over several years. Essentially Mr. Trebitsch promised to invest their money. In fact he only invested part of it and diverted other portions.
False statement: The Australian Securities Investment Commission announced that Michael Walker, the director of a Sydney based company, pleaded guilty to filing a false statement with the Commission. The document was for voluntary delisting. He was sentenced to a $350 good behavior bond for a period of twelve months and disqualified form managing corporations until December 2020.
Inadequate procedures: The Securities and Futures Commission reprimanded J.P. Morgan Broking (Hong Kong) Ltd., J.P. Morgan Securities (Asia Pacific) Limited and J.P. Morgan Securities (Far East) Limited and fined them, respectively, $15 million, $12 million and $3 million for failing to implement adequate systems and controls in its institutional equities business related to short selling, client facilitation and principal trading and the operation of dark liquidity pool trading services.