This Week In Securities Litigation (Week ending December 2, 2016)

The focus this week was offering fraud actions. Three cases were brought. One involved a registered transfer agent. A second centered on claims that the defendant was an expert trader. The third was based on false claims regarding the defendant’s educational background and claimed fortune supposedly emanating from trading in Google shares at a very early stage.

The SEC also filed a valuation case against adviser PIMCO. It centered on false claims regarding the initial success of a new product.


Remarks: Andrew Ceresney, Director, Division of Enforcement, delivered the keynote address at ACI’s 33rd International Conference on the FCPA. His remarks reviewed cooperation and the need to self-report to be eligible for a DPA or NPA, reviewed the Och-Ziff and JP Morgan actions and discussed international cooperation (here).

Committee: The Commission voted to renew its Equity Market Structure Advisory Committee. Its charter now runs until August 2017.


Remarks: Deputy AG Sally Q. Yates delivered remarks at the 33rd Annual International Conference on Foreign Corrupt Practices, Washington, D.C. Nov. 30, 2016). Her remarks reviewed the focus on individuals, noting that the Department is pleased with the results to date (here).

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 3 civil injunctive case and 1 administrative proceedings, excluding 12j and tag-along proceedings.

Valuation: In the Matter of Pacific Investment Management Company, LLC, Adm. Proc. File No. 3-17701 (December 1, 2016) is a proceeding naming as a Respondent the investment adviser known as PIMCO. In late February 2012 the firm launched its Total Return-Exchange-Traded Fund, the firm’s first actively managed exchange-traded-funds. Early performance for the fund exceeded that PIMCO’s flagship mutual fund and its benchmark index. The performance was based on a strategy crafted for the launch of the product involving the purchase of odd lots which were then valued at the price assigned by the firm price vendor at those assigned to round lots. Yet odd lots sell at a discount. Although firm personnel were aware of these facts, the higher round lot prices were used resulting in mispricing. In disclosure documents regarding the product the firm attributed the results to other factors without revealing the odd-lot strategy. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and Investment Company Act Section 34(b). To resolve the case the firm agreed to the retention of an independent compliance consultant and consented to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. In addition, the firm agreed to pay disgorgement of $1,331,628.74, prejudgment interest and a civil penalty in the amount of $18.3 million.

Offering fraud: SEC v. Katzen, Civil Action No. 16 Civ. 06606 (E.D.N.Y. Filed November 29, 2016) names as a defendant Harrison Katzen, formerly a registered representative, and purportedly an officer and director of Dunhill Investment Holdings, Inc. Together with International Stock Transfer, Inc., a registered transfer agent, Cecil Speight, the firm’s president and owner, and two attorneys, James Schmidt and Jonathan Flom, he is alleged to have defrauded 60 investors out of $3.2 million. From about 2012 through mid-2013 Ms. Speight offered for sale debt bonds of Altmark Holdings, Inc. which promised returns of 14% or 12.5%, depending on the specific bonds. In addition, stock was offered in PDL Portfolio (XIX) Ltd. which promised a fixed rate of return of 20%. The offerings were made through International Stock Transfer. Websites were used to solicit investors. The sites were staffed by teams of supposed financial advisers. The sales pitch and offering materials touted the high rate of returns. In fact the claims were fictitious and the securities were worthless. For example, Altmark is an actual issuer founded in Switzerland and based in the Turks & Caicos. What investors did not know is that Ms. Speight incorporated another Altmark entity in Belize using the same name as the real firm. In furtherance of the scheme, International Stock Transfer issued fake certificates for the bonds. The interest payments promised by the so-called advisers were made for a time by channeling a portion of the investor funds back to investors. Other portions of the investor money went to International Stock Transfer. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See also SEC v. Flom, Civil Action No. 14-CV-5575 (E.D.N.Y.)(action against other participants in the scheme). See Lit. Rel. No. 23696 (Nov. 30, 2016).

Offering fraud: SEC v. Blackbird Capital Partners, LLC, Civil Action No. 2:16-cv-01199 (D. Ut. Filed Nov. 28 2016) names as defendants Blackbird, a member of the National Futures Association and a registered Commodity Trading Advisor, and Andrew Kelley and Paul Shumway, founders and managers of the firm. Beginning in September 2014, and continuing to the present, the individual defendants solicited investors for Blackbird. They falsely claimed that Mr. Kelly was an expert trader who had previously developed algorithmic software that had been purchased for millions of dollars and was being used by financial institutions, including JP Morgan Chase Bank and Wells Fargo Bank. Indeed, Mr. Kelly claimed to have made very profitable investments that had paid returns as high as 300% in one year. The claims were incorrect. About $3.1 million was raised from several investors. The funds were supposed to be used for trading. Mr. Kelly did trade with portions of the money. By October 2016 he had about $2 million in losses using investor funds. Defendants continue to solicit investors who were told that their funds would be invested. In November 2016 Mr. Kelly deposited at least $750,000 into his brokerage account, portions of which came from investors. Between November 17, 2016 and November 22, 2016 Mr. Kelly lost another $100,000. Other portions of the investor funds were used to repay investors. The complaint alleges violations of Securities Act Sections 17(a) and 17(a)(2) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23695 (November 30, 2016).

Offering fraud: SEC v. Onix Capital LLC, Civil Action No. 16-24678 (S.D. Fla. Filed Nov. 2016) names as defendants the firm and its owner, Alberto Chang-Rajii. Beginning in June 2010, and continuing until March 2016, Defendants raised about $7.4 million from investors based on a series of misrepresentations. Defendants sold about $5.7 million in Onix Capital promissory notes which supposedly were guaranteed to pay interest at rates from 12% to 19%. Another $1.7 million was raised from investors who purchased interests in a number of special purpose vehicles which supposedly held indirect interests in firms such as Uber. Key to the sales were representations touting Mr. Chang’s background and rise to a wealthy investor, all of which were false. As news articles disclosed the falsehoods regarding his background he fled the country and the investments foundered. Latter he transferred portions of the investor money out of the country. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(4). The case is pending.


Procedures: The regulator fined Merrill Lynch $7 million and the firm will pay $780,000 in restitution. FINRA concluded that the firm did for not adequately supervise certain customer accounts and lacked procedures regarding the suitability of certain purchases. Specifically, the firm lacked adequate procedures to supervise loan management accounts which permitted customers to use their securities as collateral for loans at an affiliated back with certain restrictions. The firm also lacked adequate procedures to assess the suitability of purchasing certain securities.

Conflicts: The regulator found that VALIC Financial Advisors, Inc. created a conflict for its registered representatives by the way it compensated them for certain transactions. Specifically, over a three year period beginning October 2011 the firm provided a financial incentive to its registered representatives to recommend that customers move their funds from LALIC variable annuities to the firm’s fee-based platform or to its fixed income annuity. The inherent conflict of this compensation scheme was bolstered by prohibiting compensation when customers moved from the firm product to non firm VAs, mutual funds or other such products. VALIC Financial also failed to maintain the proper supervisory procedures with regard to certain aspects of sales of individual VAs. In addition, the firm failed to furnish its principals with adequate information to review the transactions and to enforce its rules regarding the review of required VA disclosure forms. The firm was fined $1.75 million.


Agreement: The Board entered into a cooperative agreement with the Nazionale per le Societa e la Borsa or CONSOB, the Italian audit regulator. The agreement provides for cooperation and joint inspections. The PCAOB has similar agreements in most European countries.

Hong Kong

Disclosure: The Market Misconduct Tribunal fined AccrossAsia, $600,000, its former chairman, Albert Check, $800,00 and its CEO, Vicente Ang, $600,000 for breaching the obligation to disclose material information. Specifically, on November 7, 2016 the Tribunal found that a petition had been filed against the firm in Indonesia was not timely disclosed.

Market access: The Securities and Futures Commission and the China Securities Regulatory Commission approved the launch of Shenzhen-Hong Kong Stock Connect. This arrangement expands mutual stock market access between Hong Kong and the Mainland to cover the Shenzhen Stock Exchange. This includes an expansion of the cross-boundary regulatory cooperation for real-time surveillance by the SFC and the CSRC of activity in their respective markets.


Insider dealing: The Financial Conduct Authority obtained guilty pleas to insider dealing charges from two individual, Manjeet Mohal and Reshim Birk. Mr. Mohal obtained inside information regarding the proposed takeover of Logica Plc. where he had been employed for a number of years by CGI Holdings (Europe) Ltd. He disclosed the information to a neighbor, Mr. Birk who traded, reaping profits of about $100,000. Mr. Mohal pleaded guilty two counts of illegal disclosure of inside information. Mr. Birk pleaded guilty to one count of insider dealing. Sentencing will be on January 13, 2017.

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