This Week In Securities Litigation (Week ending July 28, 2017)
The Commission took the relatively unusual step of issuing an Exchange Act Section 21(a) report of an investigation last week. The report addressed the question of whether tokens issued by a firm using blockchain technology were securities.
Halliburton Company settled FCPA charges with the Commission last week, agreeing to pay $29.2 million. Other enforcement actions brought last week included: three offering fraud cases, one involving a cellphone app and another interests in oil drilling projects; an action centered on a scalping charge; a proceeding involving an investment adviser alleged to have violated multiple provisions of the Advisers Act including a claim regarding valuation; and a manipulation action.
Finally, gambler Billy Walters was sentenced to serve four years in prison after being convicted in an insider trading action. The Manhattan U.S. Attorney’s Office also moved to dismiss two prosecutions tied to the infamous London Whale case.
Securities Class Actions
Filings: Securities class action filings continue to soar to record heights, according to a recent report by Cornerstone Research (here). In the first half of the year there were 226 new filings compared to 120 during the same period the year before and an average for 96 for similar periods with a high of 152 and a low of 55 since the passage of the PSLRA.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 1 report of an investigation, 4 civil injunctive cases and 3 administrative proceedings, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Dodson, Civil Action No. 2:17-cv-05520 C.D. Cal. Filed July 26, 2017) is an action which names as a defendant Joey Dodson. Defendant controlled a group of companies known as Citadel Energy. Over a period of less that two years, beginning in late 2012, Mr. Dodson and his firm raised about $15.5 million by selling securities in the various Citadel Energy affiliates. Mr. Dodson made a series of misrepresentations in connection with the solicitation of the investors including about the use of the proceeds, regarding an important land lease and concerning the ownership of certain assets. He also co-mingled the funds among the various entities, misappropriated portions of the investor funds, and used other portions to make Ponzi type payments to certain investors. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the action Mr. Dodson consented to the entry of a permanent injunction enjoining him from violating the Sections cited in the complaint. He was also directed to pay disgorgement of $1,718,026, prejudgment interest and a penalty of $859,013. See Lit. Rel. No. 23888 (July 26, 2017).
Offering fraud: SEC v. Giunti, Civil Action No. 3:17-cv-01504 (S.D.Cal. Filed July 25, 2017). Defendant John Giunti formed Interactive Media Solutions, LLC, also a defendant. Mr. Giunti was the sole principal of the firm which operated from his home. The firm claimed to have an app that could send money from any cellphone in the United States to any bank or be used for paying bills. For a little over one year, beginning in mid-2015, Mr. Giunti offered investors interests in the firm. Interactive Media was portrayed as a successful start-up to investors from which they could profit. Investors were told that the firm had positive cash flow and that additional capital was required to move the product forward. A $5 million IPO was planned for the future. Overall 24 investors put almost $500,000 into the firm. The representations made to investors were false. There is no evidence that the firm actually had any app or any product. Much of the investor money was diverted to the personal expenses of Mr. Giunti. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). To resolve the action each defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. Disgorgement in the amount of $457,960, along with prejudgment interest, will be paid on a joint and several basis by the Defendants. In addition, Mr. Giunti will pay a penalty in the amount of the disgorgement and is barred from serving as an officer or director of a public company and from raising money from investors in any securities offerings. See Lit. Rel. No. 23887 (July 26, 2017).
Prime bank fraud: SEC v. Marino, Civil Action No. 2:17-cv-02017 (D. Nev. July 25, 2017) is an action which names as defendants: Anthony Marino who has previously been enjoined by the Commission from violating the antifraud provisions of the securities laws; George Polera; and United Business Alliance, LLC, a firm controlled by the individual defendants. Over about a two year period beginning in late 2013 defendants sold securities generally known as prime bank instruments or guarantees to investors. About $615,500 was raised from 10 investors. In fact the investments, sold using the services of an attorney who supposedly acted as an escrow agent, were fictitious. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23886 (July 26, 2017).
Registration/custody rule/valuation: In the Matter of Brian Kimball Case, Adm. Proc. File No. 3-18073 (July 25, 2017) is a proceeding which names as Respondents Bradway Financial LLC, a registered investment adviser which specialized in advising individuals and high net worth individuals; Bradway Capital Management, LLC, a firm not registered with the Commission which claims to advise only private funds; and Mr. Case who owns and controls both firms. From about 2013 through 2015 Respondents variously engaged in a series of violations: 1) Bradway Capital failed to register as required; 2) the firm gave statements to investors which had inflated asset values, although fees were not paid to the firm or Bradway Financial based on the valuations; both firms failed to comply with the custody rule; 3) fund assets were improperly used to pay legal fees to defend the Commission’s investigation; and 4) Bradway Financial agreed to earn a performance fee for managing a fund without determining if the investors were qualified clients, although the fees have been repaid. The Order alleges violations of Advisers Act Sections 203(a), 205(a)(1), 206(2), 206(4) and 207. To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Both firms were censured. Mr. Case agreed to be barred from acting as a COO in the securities business with the right to apply for re-entry after three years. The two entity Respondents will pay a penalty on a joint and several basis, of $150,000. Respondents will also comply with certain undertakings which include the retention of an independent compliance consultant.
Report of investigation: Exchange Act Release No. 81207 (July 25, 2017) is a Report of Investigation under Exchange Act Section 21(a). The investigation sought to determine if The DAO, an unincorporated organization, Slock.it UG, a German entity, Slock.it’s co-founders and certain intermediaries violated the federal securities laws. The investigation focused on the sale by The DAO, an autonomous organization that used blockchain technology to operate as a “virtual entity,” of tokens. Those tokens represented interests in its enterprise and could be paid for with virtual currency. The tokens could also be held as an investments and had certain voting and ownership rights. In addition, the tokens could be sold on web-based secondary platforms. Based on an analysis keyed to the elements of an investment contract, and focused on the economic reality of the transactions, the Commission determined that the tokens are securities.
Scalping: In the Matter of Joey Giamichael, Adm. Proc. File No. 3-18072 (July 25, 2017) is a proceeding which names as Respondents Mr. Giamichael who was, for various periods, a member of the board of directors of Medient Studios, Inc. and Fonu2 Inc. He is also the co-founder and CEO of Umbrellas Research, LLC which is a Respondent. Medient and Fonu2 were both public companies. As a director of the two firms Mr. Giamichael was required under Exchange Act Section 16(a) to file reports on Forms 3 and 4. He failed to file the reports as required. In addition, between December 2012 and October 2014 he published 45 research reports on four issuers, making buy recommendations without adequately disclosing his compensation. He also traded in the securities of the firms he recommended in a manner that was contrary to his recommendations. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and 17(b). Each Respondent resolved the proceedings, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Mr. Giamichael will pay disgorgement of $19,607.00, prejudgment interest and a penalty of $36,963.50. Umbrella will pay disgorgement of $4,320.00, prejudgment interest and a penalty of $11,963.50.
Offering fraud: SEC v. Petroforce Energy, LLC, Civil Action No. 1:17-cv-00698 (W.D. Tx. Filed July 24, 2017) is an action which names as defendants the company, William Veasey, IV who controls the firm and Javier Alvarado, Jr. and Ivan Turrentine who were employed by the company. Over a period of about eighteen months, beginning in December 2012, Mr. Veasey, through his firm, sold securities in the form of fractionalized interests in one joint venture and three limited partnerships that would conduct oil and gas exploration and drilling activities. About $3.9 million was raised from 80 investors. The offering materials did not inform investors that operations of the firm had been negatively impacted by certain issues with the wells. Investors also were not told about the timing and nature of certain claimed tax benefits. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). Each defendant settled with the Commission, agreeing to the entry of an injunction based on the Sections cited in the complaint. Messrs. Veasey and Alvarado will be required to pay disgorgement and prejudgment interest in the amount of $58,204 and $10,800, respectively. The firm and Mr. Veasey will pay civil penalties of $150,000 and $90,000 respectively. Each of the individual defendants also agreed to the entry of penny stock bars based on the injunctions entered in this action. See Lit. Rel. No. 23884 (July 25, 2017).
Manipulation: SEC v. Farmer, Civil Action No. 14-cv-2345 (S.D. Tex.) is a previously filed action against Andrew Farmer and others. The action centered on a pump-and-dump manipulation scheme involving a firm that supposedly had a revolutionary process permitting environmentally friendly oil and gas production. The court entered a final judgment by consent against Mr. Farmer, enjoining him from future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The order includes permanent penny stock and officer and director bars. Mr. Farmer will pay disgorgement and prejudgment interest of $2.2 million and a civil penalty of $ 2 million. Previously, the court granted the SEC’s motion for summary judgment against Mr. Farmer and entered final judgments against two other defendants. See Lit. Rel. No. 23883 (July 24, 2017).
FCPA – Anti-corruption
In the Matter of Halliburton Company, Adm. Proc. File No. 3-18080 (July 27, 2017) is an action which names as Respondents the firm, a global oilfield services company, and Jeannot Lorenz, a French citizen who is a permanent resident of the U.S. He is a former Halliburton vice president and was the country manager in charge of the firm’s operations in Angola from 1993 through 2002. He is no longer with the firm. From April 2010 through April 2011 Halliburton paid about $3.7 million to a local Angolan company which had been proposed to a Sonangol Official to satisfy local content requirements. The firm was owned by a former Halliburton employee and a friend and neighbor of the Sonangol government official. Halliburton obtained lucrative oilfield services contracts from the government. Some of the payments to the Angolan company pre-dated the time Halliburton obtained the leases. The payments were made under two contracts negotiated by Mr. Lorenz and others. The contracts were entered into in violation of the firm’s internal controls. While they were executed for the purpose of satisfying the local content rule, that fact was not reflected in the firm’s books and records. Rather, the books and records were falsified. The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). Each Respondent settled, consenting to the entry of a cease and desist order based on the Sections cited in the Order except the order as to the company does not include Section 13(b)(5). The company will pay disgorgement of $14 million along with prejudgment interest and a penalty equal to the amount of the disgorgement. The firm will also comply with certain undertakings, including the retention of an Independent Consultant. Mr. Lorenz will pay a civil penalty of $75,000.
Insider trading: U.S. v. Walters, No. 1:16-cr-00338 (S.D.N.Y.). William “Billy” Walters, a well known Las Vegas gambler, was sentenced to serve five years in prison for conspiracy to commit insider trading. The scheme centered on the relationship between Mr. Walters and Thomas Davis, a director of Deans Foods, a Fortune 500 firm which is the largest processor and distributor of fresh milk in the U.S. For a period of six years beginning in 2008 the two men participated in a scheme to trade on inside information about the company. Mr. Walters is reputed to have had actual and unrealized profits and avoided losses totaling about $43 million. In addition to the prison term, the court directed that Mr. Walters serve one year of supervised release and pay a $10 million fine.
Insider trading: U.S. v. Klein (S.D.N.Y.) is an action which names Tibor Klein, a registered investment adviser, as a defendant. Mr. Klein pleaded guilty to one count of conspiracy to commit securities fraud. The plea was based on the fact that Mr. Klein received inside information on the acquisition of King Pharmaceuticals, Inc. by Pfizer, Inc., from his friend, Robert Schulman, an attorney on the team representing King. Mr. Klein’s trading netted him over $400,000 in illegal trading profits.
Concealed trading losses: U.S. v. Martin-Artago, 13 Mag 1975 (S.D. N.Y. Filed August 14, 2013); U.S. v. Grout, 13 Mag. 1976 (S.D.N.Y. Filed August 14, 2013). The U.S. Attorney’s Office moved to dismiss charges against two former JP Morgan derivatives traders who were colleagues of Bruno Iksil, the London whale. Javier Martin-Artijo, Managing Director and Head of Credit and Equity Trading for the Chief Investment Office, and Julien Grout, Vice President and derivatives trader in the CIO, were charged with conspiracy to conceal certain trading losses, false books and records, wire fraud and making false filings with the SEC. In requesting dismissal the government noted that on April 23, 2015 a court in Spain rejected a request to extradite Mr. Martin-Artajo. Previously, a determination had been made that attempts to extradite Mr. Grout from France would have been futile. In addition, the charges were based in part on the ability of the government to call Mr. Iksil as a witness. Based on recent statements and writings by Mr. Iksil the government no longer believes it can rely on his testimony in prosecuting the case even if the defendants appear. SEC v. Martin-Artago, Civil Action No. 13-cv-5677 (S.D.N.Y. Filed August 14, 2013).
Registration revocation: In the Matter of Crowe Horwath (HK) CPA Ltd., PCAOB Release No. 105-2017-031. Respondent is headquartered in Hong Kong. The firm is a member of the Crowe Horwath International network. It has been registered with the Board since 2016. A number of its audit clients have operations in the PRC and are U.S. issuers who file reports with the SEC. In connection with a Board investigation regarding the audit of one of those issuers, a request was made to review the audit work papers. Respondent did not produce the papers, citing the objection of PRC authorities. The firm claimed it was unable to access the papers through an MOU between the Board and PRC authorities. Crowe Horwath’s request to withdraw its registration during the investigation was denied. In view of the firm’s failure to cooperate with the Board’s investigation sanctions were imposed. The firm was censured and its registration revoked. After three years the firm can reapply for registration.
Fraud: The Australian Securities Investment Commission charged Bradley Keith Silver with seven counts of fraud and six counts of dishonest use of his position as a director. Between 2008 and 2010 Mr. Silver was a director of a Gold Coast property development company known as All About Property Developments Ply Ltd (AAPO). In February 2011 the company was placed in liquidation owing investors about $9 million. The Australian Federal Police arrested Mr. Silver who was subsequently released on bond.