This Week In Securities Litigation (Week ending Jan. 5, 2017)
This is the second of two articles reviewing events that took place during the holidays. Specifically, the first article appeared yesterday and reviewed key events concerning securities enforcement litigation from December 23, 2017 through the last business day of 2017. This article reviews enforcement actions for the first week of the new year, January 1, 2018 through January 5, 2018.
Statement: Chairman Jay Clayton and Commissioners Kara M. Stein and Michael S. Piwowar issued a statement on “NASAA Reminds Investors to Approach Cryptocurrencies, Initial Coin Offerings and Other Cryptocurrency-Related Investment Products with Caution” by NASAA (Jan. 4, 2018). The statement reiterates earlier releases, cautioning investors about cryptocurrencies (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 2 civil injunctive case and 1 administrative proceeding, excluding 12j and tag-along proceedings.
Legal opinions: SEC v. Naccarato, Civil Action No. 1:17-cv-24682 (S.D. Fla.) is a previously filed action against attorney Owen Naccarato. The complaint alleged that Mr. Naccarato improperly issued two Rule 144 opinions regarding the shares of microcap issuer, Global Digital Solutions, Inc., claiming it was not a shell company and that certain shareholders were not affiliates. He also improperly instructed the transfer agent to remove certain restrictive legends on shares. To resolve the action Mr. Naccarato consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a) and 5(c) and directing that he pay disgorgement of $1,000, prejudgment interest and a penalty of $10,000. See Lit. Rel. No. 24024 (Jan. 5, 2018).
Excessive fees: SEC v. Bassily, Civil Action No. 16-cv-2733 (S.D.N.Y.) is a previously filed action against Khaled Bassily, the former head of ConvergEx Group’s transition management business. The complaint centered on claims that the firm defrauded charities, religious organizations, and retirement funds by charging substantially higher amounts than disclosed for the execution of trading orders. To resolve the matter Mr. Bassily consented to the entry of a final judgment imposing a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 15(c)(1) and Securities Act Section 17(a). In addition, Mr. Bassily was directed to pay a total of $988,414 in disgorgement, prejudgment interest, and penalties. He also consented to the entry of an order barring from the securities industry in a separate administrative proceeding. See Lit. Rel. No. 24023 (Jan. 3, 2018).
Undisclosed conflicts: In the Matter of LKL Investment Counsel, LLC, Adm. Proc. File No. 3-18328 (Jan. 3, 2018) is a proceeding which names as Respondents, the former registered investment adviser and Mark Love, the firm’s sole member, president and COO and a managing member of various private funds. In 2009 Mr. Love began recommending that firm clients invest in private funds without disclosing in LKL’s Forms ADV that he held managerial interests in those funds – a fact known to the clients. Nevertheless, from 2010 through 2015 the Forms ADV falsely stated that Mr. Love had no outside financial industry activities or affiliations and did not have any ownership or proprietary interests in client transactions. During an examination by the staff in 2016 these misrepresentations were reiterated to the staff. When the staff requested documents on the question only a portion of the materials were produced. After the examination only partial disclosure was made. The firm also failed to refund a pro rata share of pre-paid fees for multiple client accounts closed in mid-quarter after the firm’s inspection as required. At about the same time, the firm acknowledged that it had materially overstated AUM. Despite being required to furnish investors with a revised brochure or summary of material changes to the brochure within 120 days of the end of the firm’s fiscal year, it failed to do so. The firm had other compliance issues which resulted in a failure to disclose Mr. Love’s activities. The firm has agreed to certain undertakings, including a notice to advisory clients and any investment adviser and to furnish certifications of compliance with its undertakings. The Order alleges violations of Advisers Act Sections 204(a), 206(4) and 207. To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. Mr. Love is also barred from acting in a compliance capacity in the securities industry. The LKL will pay a penalty of $100,000 while Mr. Love will pay $50,000.
Conflicts: SEC v. Malachi Financial Products, Inc., Civil Action No. 3:18-cv-00001 (S.D.M.S. Filed Jan. 2, 2018) is an action which names as defendants the firm, a registered municipal adviser, and its sole shareholder and owner, Porter Bingham who has been repeatedly sanctioned by regulators over the years. The action centers on the 2015 $1.1 million municipal bond offering by Rolling Fork, Mississippi, a town of just over 2,000 people. In January 2015 the town hired Malachi and executed an Agreement for Professional Financial Advisory Services. It called for a 2% fee for the offering. Prior to the execution of that agreement Mr. Bingham was provided with $2,500 by his long time friend, Anthony Stovall. At the time Mr. Stovall was a registered representative with a now defunct underwriter. Mr. Stovall and his firm were later hired as the underwriter for the offering based on the recommendation of Mr. Bingham. There was no disclosure of the payment by Mr. Stovall. After the offering Malachi billed the City twice. One invoice was based on the agreement and was for $22,000. The second was for what were claimed to be additional services. It was for $33,000. It was not authorized by the agreement. While the invoices were addressed to the Mayor, they were sent to the bond trustee who paid them. The City was not aware of the invoices at the time they were paid. The complaint alleges violations of Exchange Act Section 15B(a)(5) and 15B(c)(1). The action is pending. See Lit. Rel. No. 24025 (Jan. 5, 2018). See also In the Matter of Anthony A Stoval, 3-18330 (Jan. 5, 2018)(proceeding based on conduct detailed above; Order alleges violations of MSRB Rule G-17; resolved with an order suspending Mr. Stovall for a period of six months and the payment of a $20,000 penalty).
Financial Fraud: U.S. v. Gluk, No. 1:13-cr-00346 (W.D. Tx.) is an action in which Michael Gluk, the former CFO of ArthroCare Corporation, was sentenced to serve 50 months in prison. His initial conviction had previously been reversed by the Fifth Circuit Court of Appeals. Following the court’s decision Mr. Gluk agreed to cooperate with the Government in its prosecution of the former CEO of the company who was convicted and sentenced to serve 240 months in prison. The charges were based on a financial fraud at the company which took place from 2005 through 2009. During that period Mr. Gluk and others at the company conspired to fraudulently inflate the revenues of ArthroCare to meet analysts expectations. Specifically, they shipped product to distributors not based on orders but to meet targets under special arrangements with those distributors. At one point the firm acquired its largest distributor to conceal the fraud. Mr. Gluk pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud
Undisclosed conflicts: U.S. v. Cohen, No. 17-cr-544 (E.D.N.Y. Unsealed Jan. 3, 2018) is an action which charges Michael Cohen, a former executive managing director of New York based Och-Ziff Capital Management Group, with: conspiracy to commit investment adviser fraud; investment adviser fraud; conspiracy to commit wire fraud; conspiracy to obstruct a federal grand jury and an SEC investigation; making false statements; and four counts of wire fraud. The indictment centers on a transaction that originated in 2008 when Mr. Cohen defrauded a large charitable client of the firm in connection with an investment in an African mining company. In making that investment Mr. Cohen failed to disclose, according to the charging papers, conflicts which included the fact that one seller of shares was using the money from the sale to repay a loan to Mr. Cohen and that he personally controlled another block of shares included in the sales. When the investigations began Mr. Cohen and others took steps to conceal their conduct. The case is pending.
FCPA – Anti-corruption
U.S. v Bahn, No. 1:16-cr-0831 (S.D.N.Y. Jan. 5, 2018) is an action in which real estate broker Joo Hyun Bahn pleaded guilty to one count of conspiracy to violate the FCPA and one count of violating the FCPA. The charges were based on a scheme to bribe a Middle Eastern foreign official to secure a real estate deal for South Korean construction company Keangnam Enterprises Co., Ltd. Specifically, from February 2014 through May 2015 Mr. Bahn participated in a scheme to pay bribes to facilitate the sale by Keangnam of a commercial building in Hanoi, Vietnam to a Middle Eastern country’s sovereign wealth fund. To facilitate the transaction he paid a $500,000 bribe to Malcolm Harris who claimed to be an agent of the official. In fact Mr. Harris stole the money. He later pleaded guilty to his role in the scheme and was sentenced to serve 42 months in prison. The date for sentencing has not been set.
Fees: The Australian Securities & Investment Commission banned for life David Alafaci, formerly a registered representative at two different firms. Contrary to the instructions of his firm, he falsely represented to clients that he had the authority to issue invoices and then directed clients to send the payments to his personal bank account.
Valuation – books: The Federal Court of Australia ordered Patrick Godfrey, former managing director of Banksia Securities Limited (now in liquidation), to pay a penalty of $25,000. The court also ordered that he be disqualified from managing corporations for five years. The sanctions are based on the fact that for fiscal years 2011 and 2012 and the half year ending December 2011 the firm’s books and records did not comply with the relevant accounting standards. Specifically, during the period the relevant accounting standards regarding the impairment of mortgage investments made by Banksia were not properly applied. The books and records, accordingly, did comply with the required standards.