This Week In Securities Litigation (Week ending March 18, 2016)

The SEC filed its first action against a municipal adviser for breach of fiduciary duty based on a provision amended by Dodd-Frank. The agency also continued to file insider trading actions in an administrative forum.

Other actions filed by the Commission included: three offering fraud cases; an action based on unregistered broker charges; another financial fraud case; and a proceeding tied to undisclosed conflicts, a repeated theme of recent enforcement actions.


Remarks: David W. Grim, Director, Division of Investment Management, delivered remarks at the Investment Company Institute’s 2016 Mutual Funds and Investment Management Conference (March 14, 2016). In his remarks the Director commented on pending rule making initiatives, the decision of Third Avenue to wind down a fund, risk disclosure and the Commission’s efforts to move beyond disclosure (here).


Remarks: Commissioner J. Christopher Giancario delivered the keynote address titled What Washington Giveth, Washington Can Taketh Away at the National Grain and Feed Association Annual Convention (March 14, 2016). His remarks included comments on the new customer protection rule and on compliance (here).

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 4 civil injunctive cases and 5 administrative proceedings, excluding 12j and tag-along proceedings.

Insider trading: In the Matter of Eric J. Wolff, Adm. Proc. File No. 3-17173 (March 16, 2016). This action centers on a tender offer by Merck & Co. for the shares of Idenix Pharmaceuticals, Inc., announced on June 9, 2014. Mr. Wolff resides with, and is the life partner of, Individual A, an employee of Merck. The transaction traces to December 2013 when Merck initially expressed an interest in reviewing certain clinical trial data regarding an Idenix drug under development to treat Hepatitis C. In late February the two firms entered into a confidentiality agreement under which Merck could review the data. The firms held discussions about the companies and the drug over the next two months. By May 18, 2014 the firms had taken substantial steps toward a cash tender offer. On that same date Merck requested that Individual A work on a highly confidential matter regarding Merck’s evaluation of another firm’s drug to treat Hepatitis C. Individual A discussed the information with Mr. Wolff with whom he had a history of sharing confidential information. Based on the conversation, and his knowledge, he understood there was a merger. On May 21, 2014 Mr. Wolf purchased 5,000 shares of Idenix stock. When the deal was announced on June 9, 2014 the share price of Idenix stock increased by 229% over the previous close. Mr. Wolff had trading profits of $87,000. The Order alleges violations of Exchange Act Sections 10(b) and 14(e). To resolve the matter Mr. Wolff consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, he will pay disgorgement of $87,600, prejudgment interest and a penalty in an amount equal to the disgorgement.

Insider trading: SEC v. Han, Civil Action No. 15 Civ. 9260 (S.D.N.Y.) is a previously filed action against Yue Han, formerly an associate at Goldman Sachs who worked in the compliance department. It alleged that Mr. Han traded based on confidential information from emails at the firm. This week the court entered a final judgment by consent against Mr. Han prohibiting future violations of Exchange Act Sections 10(b) and 14(e). The judgment also directs the payment of disgorgement in the amount of $468,131. Mr. Han will relinquish any claim over accounts frozen in this case and is barred from the securities business. See Lit. Rel. No. 23491 (March 16, 2016).

Investment fund fraud: SEC v. Jones, Civil Action No. 1:16-cv-10524 (D. Mass. Filed March 15, 2016) is an action which alleges that over an eight year period beginning in 2007 Mr. Jones raised almost $10 million from investors for an enterprise called The Bridge Fund. Investors were told that their funds would be placed in bridge loans to Jamaican companies that had been approved for commercial bank loans but were waiting for funding. The loans would pay interest at 15% to 20% annually. In fact there were no loans; the entity was a Ponzi scheme. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office initiated a parallel criminal action. See Lit. Rel. No. 23490 (March 16, 2016).

Offering fraud: SEC v. RVPlus, Inc., Civil Action No. 2:16-cv-01428 (D. N.J. Filed March 14, 2016) is an action against the firm, at one time quoted on OTC link, and its CEO, Cary Lee Peterson. Beginning in May 2012 Mr. Peterson is alleged to have gained control of the firm’s stock. Although he was a control person he began transferring certain shares. He also caused the firm’s filings with the SEC and its press releases to falsely claim that the firm had a relationship with the United Nations that would result in lucrative business and in fact that RVPlus had contracts worth about $2 billion with foreign governments and over $17 million in accounts receivable. In reality these claims, which were intended to inflate the share price, were false. The Commission suspended trading in the stock. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Mr. Peterson. The case is pending. See Lit. Rel. No. 23489 (March 16, 2016).

Unregistered broker: In the Matter of Barry B. Clare, Adm. Proc. File No. 3-17172 (March 15, 2016) charges Mr. Clare, the vice president of finance for Baltia Airlines, Inc., with acting as an unregistered broker. Baltia is a start-up airline seeking certification. The firm has raised about $26 million selling its unregistered shares. Mr. Clare has solicited investors to purchase the shares. The Order alleges violations of Exchange Act Section 15(a). The proceeding will be set for hearing.

Financial fraud: In the Matter of Moduslink Global Solutions, Inc., Adm. Proc. File No. 77372 (March 15, 201) names as Respondents the firm, a supplier of supply chain and logistics services; Joseph Lawyer, its CEO; Steven Crane, its CFO; and Catherine Venable, also its CFO for a period. The Order alleges that the firm aggressively marketed its product through the use of rebate offers which it frequently did not pay despite contractual obligations to do so. Ultimately this resulted in a restatement of the firm’s financial statements in 2012 which had been inflated by as much as 1038% in certain years. The Order alleges violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) as well as SOX Section 304. The firm consented to the entry of a cease and desist order based on the Securities Act and Exchange Act Sections cited in the Order. In addition, the firm will pay a civil penalty of $1.6 million. Ms. Venable consented to the entry of a cease and desist order based on Exchange Act Section 13(b)(2)(A) and will pay a civil penalty of $20,000. Messrs. Lawler and Cane each agreed to the entry of a cease and desist order based on SOX Section 304. Mr. Lawler will repay incentive compensation of $78,991 along with 24,200 shares of stock. Mr. Crane will repay incentive compensation of $51,957.60.

Fiduciary duty: In the Matter of Central States Capital Markets, LLC, Adm. Proc. File No. 3-17170 (March 14, 2016). Central States is registered with the SEC as a municipal advisor, broker-dealer and investment adviser. Respondents Mark Detter, David Malone and John Stepp are executives at Central States. Mr. Stepp first became associated with Broker-Dealer in 2008. In 2009 he brought Messrs. Detter and Malone to the firm. In August 2010 Mr. Stepp formed Central States with the intention of separating from Broker-Dealer and taking the municipal advisory and underwriting business he managed with him to the new entity. The next year he hired Messrs. Detter and Malone. The three men remained with Broker-Dealer under Independent Representatives Agreements. Central States then served as municipal adviser to City for three offerings and Broker-Dealer acted as underwriter. The conflict was not disclosed. The Order alleges violations of Exchange Act 15B(c)(1)(imposing fiduciary duty on municipal advisers) and certain MSRB Rules. To resolve the action each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and MSRB Rule G-17 (failure to disclose certain conflicts). The order as to each individual also included MSRB Rule G-23 (prohibits serving as financial adviser and underwriter at same time). The firm was censured. In addition, the firm will pay disgorgement of $251,650, prejudgment interest and a penalty of $85,000. Messrs. Detter and Malone were each barred from association with a broker-dealer and from association with an investment adviser with a right to apply for re-entry after, respectively, two years and one year. Mr. Stepp is subject to a similar prohibition for six months. Finally, Messrs. Detter, Malone and Stepp will each pay a penalty in the amount of, respectively $25,000, $20,000 and $17,500.

Conflicts: In the Matter of Royal Alliance Associates, Inc., Adm. Proc. File No. 3-17169 (March 14, 2016). Respondents are Royal Alliance, SagePoint Financial, Inc. and FSC Securities Corporation. Each is a registered broker-dealer and investment adviser. Each is owned by AIG Advisor Group, Inc., which provides certain shared services, including compliance support for the advisory businesses. Advisor Group is indirectly owned by AIG. The proceeding centers on undisclosed conflicts and the failure to properly implement procedures to avoid reverse churning despite warnings from OCIE. First, over a two year period beginning in 2012, Respondents invested advisory clients in mutual fund share classes with 12b-1 fees when there were lower-fee classes of the same funds available that did not have such charges. This resulted in Respondents being paid about $2 million in 12b-1 fees that would otherwise not have been available. Second, under the advisory compliance policies and procedures in effect since 2009, the three firms were required to monitor the level of trading activity in their advisory accounts for inactivity or what is called reverse churning. Despite warnings from OCIE they did not. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and 207. In resolving the matter the SEC took into account the remedial efforts of Respondents. The firms also agreed to implement a series of undertakings which included the retention of an independent consultant. Respondents consented to the entry of a cease and desist order from committing or causing any violations and any future violations of the Sections cited in the order. They were also censured. In addition, the three firms, jointly and severally, agreed to pay disgorgement of $1,956,460 along with prejudgment interest. They will also pay on the same basis a penalty of $7.5 million.

Offering fraud: SEC v. BIC Real Estate Development Corp., Civil Action No. 1:16-at-00185 (E.D. Cal. Filed March 11, 2016) is an action which names as a defendant the firm and CEO, Daniel Nase. The complaint alleges that from July 2013 to September 2015 the defendants raised at least $11.6 million from about 400 investors through the sale of unregistered shares of BIC. While investors were told the funds would be used to purchase real property in Bakersfield, California and interests in promissory notes in fact Mr. Nase misappropriated a substantial portion of the money. Once the SEC began its investigation he tried to conceal that fact by reinvesting part of the stolen funds, claiming he was increasing his equity stake in the company. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 23487 (March 11, 2016).

Offering fraud: SEC v. Aequitas Management, LLC, Civil Action No. 3:16-cv-00438 (D. Or. Filed March 10, 2016). Defendants Robert Jesenik, Brian Oliver and Scott Gillis owned and controlled a group of companies under defendant Aequitas Management. Those firms included: Aequitas Holdings, LLC, which owned Aequitas Commercial Finance, LLC or ACF, which controlled at least seven subsidiaries that acquired or invested in a portfolio of trade receivables as well as Acequitas Capital Management, Inc. or ACM, and had stakes in the Acquitas Funds and other affiliates; ACM also served as the manager of ACF and was the sole owner of Aequitas Investment Management, LLC, a registered investment adviser and the manager of the Aequitas Funds. Each of the aforementioned named entities is a defendant in the litigation. Since 2003 ACF has raised hundreds of millions of dollars from numerous investors through the issuance of promissory notes at favorable rates through a program known as the Private Note Program. From 2011 through 2013 ACF was profitable. Its trade receivables were heavily concentrated in educational loans from Corinthian Colleges which defaulted in 2014 and filed for Chapter 11 protection the next. This caused financial difficulty. Nevertheless, in 2014 and 2015 the group was able to raise about $350 million without disclosing its true financial condition to investors – it was concealed by a large, but uncollectable inter-firm receivable. In February 2016 a consultant was retained to conduct an orderly wind-down of the business. Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation.


Disciplinary actions: The Board announced settled disciplinary orders in which five audit firms were sanctioned for violating the independence requirements. A sixth firm was not sanctioned based on its extraordinary cooperation (here).


Insider trading: Fei Yu pleaded guilty to one charge of insider trading with a second to be considered at sentencing. He purchased shares and contracts for difference in Veda Advantage Ltd in January 2007 while in possession of information about a proposed take over of the firm by Pacific Equity Partners. The information was acquired from a close friend who was an executive in the corporate finance advisory division of Caliburn Partnership, an adviser to Veda. The trades were placed through his mother’s account and that of an associate. Mr. Yu invested about $35,000 and had profits of $20,000. Sentencing will be on 21 July 2016.

Hong Kong

Client funds: The Securities and Futures Commission fined Uniccorn Securities Co. and its former responsible officer, Chan Hoi Shu, respectively, $3 million and $200,000. Mr. Chan was also suspended for a period of 15 months. The SFC found that the firm and Mr. Shu repeatedly failed to follow client directives with respect to the payment of dividends and that funds had been taken from client accounts without the proper authorization, a fact that also illustrated the lack of appropriate procedures.


Insider dealing: Damian Clarke, a former equities trader at Schroders Investment Management Limited, pleaded guilty to a total of nine counts of insider dealing. He obtained the information through his position as an equity trader at the firm. Overall he had trading profits of £155,161,98. Sentencing will be held 13 June 2016.

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