This Week In Securities Litigation (Week ending Dec. 8, 2017)
The DOJ announced the formalization of a new FCPA cooperation policy built on the success of its Pilot Program. That program resulted in a significant increase in firm’s self-reporting and cooperating, the goal of the new policy. The new initiative centers on a presumed declination for those that self-report and fully cooperate under certain circumstances.
The SEC’s new cyber unit brought its first case this week. The action was based on a fraudulent offering of a cryptocurrency.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 5 civil injunctive cases and 4 administrative proceeding, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Smith, Civil Action No. 17 5480 (E.D. Pa. Filed Dec. 7, 2017) is an action against Paul Smith, who has been a registered representative since 1982 and a registered investment adviser since 1991. He is an adviser to the Haverford Group, a partnership Mr. Smith formed to serve as a pooled investment vehicle. For about 25 years, beginning in 1991, Mr. Smith raised about $2.35 million from 30 investors by claiming he would invest their money through the Haverford Group. This contravened his firm’s policies. In fact he used portions of the funds to repay other investors and for his own purposes. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Adviser Section Sections 206(1), 206(2) and 206(4). To resolve the case Mr. Smith consented to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement and prejudgment interest of $362,858.45 which will be deemed satisfied by the entry of an order in the parallel criminal case of a restitution order requiring the payment of a greater amount.
Unsuitable trading: SEC v. Berkey, Civil Action No. 1:17-cv-09552 (S.D.N.Y. Dec. 6, 2017) is an action which names as defendants registered representatives Zachary Berkey and Daniel Fischer. Each defendant disregarded his duty to clients and recommended an unsuitable in-and-out strategy that caused losses but increased commissions. Mr. Berkey used this strategy from 2013 to 2014 for up to six clients, and Mr. Fischer from 2012 to 2015 for four clients. As a result Mr. Berkey had commissions of about $106,000 and Mr. Fischer about $175,000. The ten customers had losses of $573,867. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. Fischer resolved the action, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay disgorgement and prejudgment interest and a penalty of $160,000 as well as an order barring him from the securities business and from participating in any penny stock offering.
Insider trading: SEC v. Leonard, Civil Action No. 8:17-cv-02926 (M.D. Fla. Filed Dec. 6, 2017) is an action against Stephen Leonard. The complaint centers on the July 22, 2014 announcement by Puma Biotechnology, Inc. of certain positive drug trial results. Prior to that time, Mr. Leonard had a series of telephone conversations with his sibling who had a senior position at Puma. There was a relationship of trust and confidence between Mr. Leonard and his sibling. Nevertheless, after each call Mr. Leonard purchased Puma stock, acquiring over time a block of 450 shares. Following the announcement he sold part of the shares realizing profits of about $74,000. On the balance of the shares he had unrealized profits of about $33,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the case the defendant consented to the entry of a permanent injunction precluding violations of the Section cited in the complaint. He also agreed to pay disgorgement of $107,000, prejudgment interest and a civil penalty equal to his trading profits. See also Lit. Rel. No. 24005 (Dec. 7, 2017).
Disclosure: In the Matter of Paritosh Gupta, Adm. Proc. File No. 3-18296 (Dec. 5, 2017) is a proceeding which names as Respondents, Paritosh Gupta, a research analyst at Adviser A; Adi Capital Management LLC, an investment adviser to five funds; Nehal Chopra, the wife of Mr. Gupta; and Ratan Capital Management, L.P., an investment adviser to four private funds. Mr. Gupta improperly shared confidential information and advise obtained from his employment position with Ms. Chopra. She in turn used that information at Ratan. Sharing information from his employer resulted in violations of Advisers Act Section 206(2) by Mr. Gupta. Ratan and Ms. Chopra also failed to disclose to investors the significant role that Mr. Gupta played in the operations of the funds. This violated Sections 206(4) and 207 of the Advisers Act. Mr. Gupta was the cause of Ratan’s and Ms. Chopra’s violations of Section 206(4). In 2014 Mr. Gupta launched Adi Capital Management LLC, a hedge fund with a strategy similar to that of Ratan and the adviser that Mr. Gupta worked with. From February 2014 through September of that year Adi’s Form ADV inaccurately stated that Mr. Gupta and Ms. Chopra did not share confidential investment related information regarding their funds’ current or potential investments in violation of Section 207 of the Advisers Act. To resolve the proceedings each Respondent consented to the entry of a cease and desist order and a censure as follows: Mr. Gupta, Advisers Act Sections 206(2), 206(4) and 207; Adi, Advisers Act Section 207; and Ratan and Ms. Chopra, Advisers Act Sections 206(4) and 207. Respondent Gupta will pay a penalty of $250,000; Ms. Chopra, $200,000; and Ratan, $200,00. See also In the Matter of Brahman Capital Corp., Adm. Proc. File No. 3-18295 (Dec. 5, 2017)(Fund where Mr. Gupta worked became aware of some of items noted above but failed to take any action resulting in failure to reasonably supervise, contrary to Advisers Act Section 206(4); resolved with a cease and desist order based on the Sections cited, a censure and the payment of a $250,000 penalty).
Fraudulent valuation: SEC v. Premier Holding Corp., Civil Action No. 1:17-cv-09485 (S.D.N.Y. Filed Dec. 4, 2017) is an action against the company, a provider of energy services, Randall Letcavage, its CEO and Joseph Greenblatt, a CPA who provided accounting services for the company. The complaint alleges that the firm and its CEO arranged a series of apparently important transactions designed to feign activity at the company to mislead investors. One key transaction involved the inflation of the value of its largest tangible asset, an unsecured promissory note with a face value of $5 million. Mr. Greenblatt is alleged to have assisted the scheme which. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 24000 (Dec. 4, 2017).
Audit failure: In the Matter of Anton & Chia, LLP, Adm. Proc. File No. 3-18292 (Dec. 4, 2017) is a proceeding alleging unprofessional conduct which names as Respondents the audit firm and four of its accountants, Gregory Wahl, a managing partner of the firm and co-owner; George Chung, a co-owner of the firm; Michael Deutchman, a partner in the firm; and Tommy Shek, an audit manager. The action centers on the audit of three microcap issuers. First, Accelera Innovations, Inc. improperly inflated its financial position and results by treating another firm’s revenues, assets and liabilities as its own from 2013 to 2015. Nevertheless, the audit firm opined that the financial statement presentation was proper. Second, Premier Holding Corporation grossly inflated the valuation of its largest tangible assets without any support in 2013. The audit firm simply accepted management’s valuation. Finally, CannaVEST Corp. materially overstated its first and second quarter 2013 balance sheets in its quarterly reports based on acquisitions. The audit firm failed to ascertain the overstatements. The matter will be set for hearing. See also In the Matter of Rahuldev Gandhi, CPA, Adm. Proc. File No. 3-18294 (Dec. 4, 2017)(firm accountant who settled, agreeing to pay a penalty of $15,000 and be suspended from appearing or practicing before the Commission as an accountant with a right to apply for readmission after three years); In the Matter of Richard J. Koch, CPA, Adm. Proc. File No. 3-18293 (Dec. 4, 2017)(same; agreed to pay penalty of $15,000 and to be suspended from appearing or practicing before the Commission as an account with a right to apply for readmission after two years).
Offering fraud: SEC v. MacCord, Civil Action No. 2:17-cv-01809 (WD. Wash. Filed Dec. 4, 2017). Named as defendants are Donald MacCord, Shannon Doyle and Digi Outdoor Media, Inc. Mr. MacCord is the CEO of Digi and Ms. Doyle was the firm’s CFO. The firm is in the outdoor sign business. Mr. MacCord and Ms. Dole have been friends for over 20 years. Mr. MacCord founded Digi in 2009. Subsequently, he retained his friend as CFO. The business plan for the company called for the instillation of outdoor digital display signs for advertising around Washington, D.C. To move forward the firm had to raise capital. From about 2013 through November 2014 Digi and the two individual defendants raised about $4.5 million from over 60 investors who purchased promissory notes issued by the firm. Investors were told that the firm would generate revenue by leasing space to install digital signs for commercial advertising. Throughout the period Mr. MacCord and Ms. Doyle diverted over $1.6 million from the company for their personal benefit. In February 2015 the firm filed a registration statement with the Commission for its shares. The papers contained a misleading description of Digi’s business and finances. The registration statement was prepared with the assistance of Mr. MacCord and Ms. Doyle. Ultimately Mr. MacCord fired the auditors when they sought to verify key facts. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was brought by the U.S. Attorney for the Northern District of California. See Lit. Rel. No. 24001 (Dec. 4, 2017).
Cryptocurrency: SEC v. Plexcorps, Civil Action No. 1:17-cv-07007 (E.D.N.Y. Filed Dec. 1, 2017) is the Cyber Unit’s first action. It names as defendants the company, an unincorporated entity controlled by defendant Dominic Lacroix, a securities law recidivist. Sabrina Paradis-Royer, believed to be a romantic interest of Mr. Lacroix, is also named as a defendant. The action centers on the sale of what the defendants call PlexCoin, claimed to be the next cryptocurrency. In the United States the defendants began their offering of unregistered interests in August 2017. It continues to the present. Prior to the U.S. offering defendants initiated sales of the securities in Quebec, Canada. In July 2017 the Quebec Financial Markets Administrative Tribunal entered an injunction against Mr. Lacroix, prohibiting him from future violations of the Quebec Securities Act, based on his sales efforts. Subsequently, defendants began offering interests in Plexcorps’ claimed crypocurrency in this country. Since August 2017 defendants have engaged in over 1,500 investor transactions, selling about 81 million PlewxCoin Tokens for about $15 million. Investors were induced to enter into these transactions through a series of claim which included: a representation that a team of experts around the world were involved; that the firm’s executives were hidden to avoid poaching by competitions; that new products were being developed; and the potential returns were enormous. The representations were false. To the contrary, defendants misappropriated much of the investor funds. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The complaint is pending.
Pay-to-play: SEC v. Webb, Civil Action No. 17-8685 (N.D. Ill. Filed Dec. 1, 2017) is an action which names as a defendant David Webb, the mayor Mayor of the City of Markham, Illinois. In connection with a 2012 municipal bond offering designed to fund city capital projects, Mr. Webb engaged in a pay-to-play scheme with a contractor in which he solicited a bribe. In return Mr. Web agreed to steer a multi-million construction project to the contractor. The project would be funded from the offering proceeds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the action Mr. Webb consented to the entry of a permanent injunction based on the Sections cited in the complaint. The court will determine what if any monetary amounts should be paid. See Lit. Rel. No. 23998 (Dec. 1, 2017).
FCPA – Anti-Corruption
The Department of Justice announced a revised FCPA Corporate Enforcement Policy. The new policy, designed to enable the DOJ to efficiently identify and punish criminal conduct while encouraging voluntary disclosures of wrong doing, offers the prospect of a declination, or a 50% reduction off the low end of the Sentencing Guidelines fine range, if the Department concludes that the company has cooperated and conducted the appropriate remediation. The policy was announced in a speech by Deputy Attorney General Rosenstein, delivered at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017)(here).
When there are aggravating circumstances but the firm meets self-reports and meets the other requirements of the policy, the “Department will recommend a 50% reduction off the low end of the Sentencing Guidelines fine range.” Again, criminal recidivists may not be eligible for this credit.
The final policy, which will be added to the U.S. Attorney’s Office Manual, will identify the hallmarks of an effective compliance and ethics program. Those include, according to the Deputy AG, “fostering a culture of compliance; dedicating sufficient resources to compliance activities; and ensuring that experienced compliance personnel have appropriate access to management and to the board.”
Offering fraud: U.S. v. Doumanis, No. 1:17-cr-00087 (S.D.N.Y.) and U.S. v. Pantelakis, No. 1:17-cr-00087 (S.D.N.Y.) are actions in which George Doumanis and Emanuel Pantelakis each pleaded guilty to defrauding investors in Terminus Energy. Each was charged with engaging in a scheme that began in 2008 and continued for the next six years in which private placement shares in the firm were sold to investors based a series of false representations. The nearly $8 million raised was misappropriated. Each defendant pleaded guilty to one count of conspiracy to commit securities fraud. See also SEC v. Terminus Energy, Civil Action No. 1:17cv 01117 (S.D.N.Y. Filed Feb. 14, 2017).