This Week In Securities Litigation (Week ending March 25, 2016)
The Commission prevailed on a summary judgment motion this week in a case based on an offering fraud. It also filed another settled FCPA action centered on gifts, travel and entertainment provided to healthcare professionals in return for business. Another action initiated this week which will be set for hearing named as respondents a barred auditor and his firm and centered on audit failures. Other actions file by the Commission include: two offering fraud cases and two market manipulation actions.
Testimony: Chair Mary Jo White testified before the House Subcommittee on Financial Services and General Government (March 22, 2016). Her testimony reviewed last year’s rule making and enforcement efforts while noting that there is a need for more resources to expand the oversight of investment advisers, for technology and for enforcement to investigate complex frauds (here).
SEC Enforcement – Litigated Actions
Offering fraud: SEC v. Arcturus Corporation, Civil Action No. 3:13-cv-04861 (N.D. Tex. Filed Dec. 12, 2013) is an action against Leon Ali Parvizian and his entities, Arcturus Corporation and Aschere Energy LLC. Also named as defendants were promoters Alfredo Gonzalex, AMG Energy, LLC, Robert Balunas and R. Thomas & Co. LLC. The court granted the SEC’s motion for summary judgment, finding the defendants liable. The complaint alleged that over a period of about four years beginning in 2007 Mr. Parvizian, through Arcturus and Aschere, raised about $22 million from 380 investors. The funds were for interests in oil and gas joint ventures. The defendants failed to disclose the fact that the companies were engaged in material litigation. Nevertheless, much of the money raised was used to fund that litigation. Indeed, Parvizian prematurely called for completion funds on two projects when funding for the litigation was depleted. The complaint alleged violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a).
In granting summary judgment the court found that Mr. Prvizian and his entities violated Securities Act Section 17(a) and Exchange Act Section 10(b) by offering and selling interests in a drilling project in which they had no rights to share in the profits. The court also concluded that all of the defendants engaged in the offer and sale of unregistered securities in violation of Securities Act Sections 5(a) and 5(c). The court also concluded that Messrs. Parvizian, Gonzalex and Balunas, along with AMG Energy and R. Thomas & Co. , acted as unregistered brokers in violation of Exchange Act Section 15(a). The court directed that briefs be filed on the question of remedies. See Lit. Rel. No. 23497 (March 24, 2016).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 4 civil injunctive actions and 3 administrative proceedings, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Bivona, Civil Action No. 3:16-1386 (N.D. Cal. Filed March 25, 2016) is an action which names as defendants: John Bivona, a registered representative of Felix Investments and the control person of the other entity defendants; Saddle River Advisors, LLC, which formerly conducted business as Felix Advisors, LLC and was a registered investment adviser but now is an exempt reporting adviser and is the adviser to SRA Funds; SRA Management Associates, LLC provides services to SRA Funds; and Frank Mazzola, Mr. Bivona’s nephew, formerly a registered representative at Felix Investments and was an official of the two entity defendants prior to being barred from the securities business by the Commission and FINRA. Mr. Bivona and his controlled entities are alleged to have raised over $53 million since late 2013 in the SRA Funds, supposedly a pre-IPO fund of technology companies. Investors were promised that their funds would be invested in the shares of specific companies. From the beginning, however, the funds were diverted to paying investors in earlier deals. Portions of the money was misappropriated. Mr. Bivona maintained operations by soliciting investors for another fund. The complaint alleges violations of Exchange Act Sections 10(b) and 15(a), Securities Act Sections 5(a), 5(c) and 17(a) and Advisers Act Sections 203(f), 206(1), 206(2) and 206(4) along with the violation of the bar order against Mr. Mazzola. A freeze order was entered at the time the complaint was filed. The case is pending. See Lit. Rel. No. 23501 (March 25, 2016).
Audit failure: In the Matter of Elliot R. Berman, CPA, Adm. Proc. File No. 3-17180 (March 25, 2016) names as Respondents, Mr. Berman, the owner of Respondent Berman & Company, P.A., a registered PCAOB audit firm. Both Respondents settled SEC actions in 2014 based on violations of professional standards by consenting to cease and desist orders. Mr. Berman, in connection with that proceeding, was barred from appearing or practicing before the Commission as an accountant and has not been reinstated. The Order centers on the audits of MusclePharm Corporation in 2010 and 2011. During those engagements the firm failed to note in its report that it was not independent, ignored the fact that its client’s largest customer was a related party, inappropriately relied on management representations and improperly accounted for sales incentives. The Order alleges violations of Rule 2-02(b)(1) of Regulation S-X, Exchange Act Section 13(a) and Rule 102(e). The proceeding will be set for hearing.
Unregistered offering: In the Matter of Canccord Genuity Inc., Adm. Proc. File No. 3-17178 (March 24, 2016) names as a Respondent the registered broker-dealer. Canccord was invited by an Issuer in April 2012 to participate as an underwriter in a secondary offering that was planned for mid-May. Shortly after agreeing the broker initiated research coverage of the Issuer. After that coverage was initiated the Issuer changed plans and decided to do an accelerated offering. By initiating research coverage on the firm the Order alleges a violation of Securities Act Section 5(b)(1). To resolve the proceeding Canccord consented to the entry of a cease and desist order based on Section 5 of the Securities Act and to a censure. The firm also agreed to pay $407,481 in disgorgement, prejudgment interest and a civil penalty of $100,000.
Market manipulation: SEC v. Gentile, Civil Action No. 16-cv-1619 (D.N.J. Filed March 23, 2016) is an action against Guy Gentile, the owner of a registered broker-dealer. The complaint alleges that Mr. Gentile used the broker-dealer in conjunction with illegal kick-backs and glossy mailers to manipulate the share price of two stocks, Raven Gold Corporation and Kentucky USA Energy. Most of the market activity touted in the newsletters was generated by Mr. Gentile’s broker dealer. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and17(b) and Exchange Act Section 10(b).
Market manipulation: SEC v. Affa, Civil Action No. 14-cv-12959 (D. Mass.) is a previously filed action which named as defendants Andrew Affa, Michael Affa, Mitchell Brown, Christopher Putnam and Christopher Nix. The complaint centers on a scheme to manipulate the share price of Amogear Inc., a shell company. After the initial steps were taken the SEC suspended trading in Amogear which in fact was controlled by the FBI. Each defendant settled with the SEC, consenting to the entry of permanent injunctions based on Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). Each was also barred from participating in any offering of a penny stock. In a parallel criminal action each pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud and five counts of wire fraud. See Lit. Rel. No. 23495 (March 23, 2016).
Offering fraud: SEC v. Jones, Civil Action No. 4:15-cv-438 (N.D. Tx.) is a previously filed action against attorney Gregory Jones. The complaint alleged that in 2015 Mr. Jones fraudulently raised about $645,000 by selling shares of Aquaphex Total Water Sollutions, LLC. The firm supposedly recycled fracking water. Misrepresentations regarding the investment in the company by the principals and its future prospects were used to induce investors to purchase interests. Previously, in 2009 Mr. Jones had induced a group of investors to put up about $6 million in an entity called Edwards Exploration without disclosing that he had been paid about $480,000 from investor funds. This week the court entered a judgment permanently enjoining Mr. Jones from future violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a). He was also directed to pay disgorgement of $1,125,00, prejudgment interest and a penalty of $600,000. See Lit. Rel. No. 23494 (March 23, 2016).
Market manipulation: SEC v. Strebinger, Civil Action No. 14-cv-3533 (N.D. Ga.) is a previously filed action against Bruce Strebinger, Howard Chapman and Muskateer Investments Inc. The complaint alleges a pump-and-dump scheme involving the shares of Americas Energy Company. The scheme began in May 2009 with a reverse merger done with Americas and another start-up firm. It continued with the accumulation of large positions by Messrs. Strebinger and Chatman which were concealed from the market by failing to file a Schedule 13D disclosing their positions and intent. That step was followed by the typical massive promotional campaign keyed to false publicity. As the stock price rose Messrs. Strebinger and Chapman sold shares through a web of foreign brokerage firms, reaping $17 million. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(d) and 20(b). Mr. Strebinger settled with the SEC. In a final judgment entered by the Court he was enjoined from future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(d) and 20(b). The final judgment imposes a penny stock bar and directs the payment of $1,515,640 in disgorgement. The litigation continues as to the other defendants. See Lit. Rel. No. 23493 (March 21, 2016).
In the Matter of Novartis AG, Adm. Proc. File No. 3-17177 (March 23, 2016) is a proceeding which names the pharmaceutical manufacturer as a Respondent. The Order alleges that from 2009 through 2013 the China based subsidiaries of the firm furnished various things of value to healthcare professionals in China to secure business. The payments took various forms including sightseeing or vacations, entertainment or favors to families. The activities were concealed on the books and records of the subsidiaries. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). In resolving the action the firm agreed to implement a series of undertakings which include reporting to the staff over two years regarding the remedial efforts of the company. The firm also consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay disgorgement of $21,579,217, prejudgment interest and a penalty of $2 million.
Market manipulation: U.S. v. Gallison, 1:15-cr-00178 (E.D. Va.). Harold Gallison admitted in connection with his guilty plea that he participated in an international pump-and-dump scheme. Specifically, Mr. Gallison stated that he and others sought to inflate the share price of OTC stocks Warrior Girl Corp. and Everock Inc. through coordinated trading that created the appearance of increased demand. Once the share price increased they sold or dumped their shares. The scheme was facilitated through an offshore brokerage and money laundering platform that used various names such as Sandias Azucaradas, Moneyline Brokers and others. The scheme generated more than $25 million. He was sentenced to serve 216 months in prison after pleading guilty to two counts of conspiracy to commit wire fraud, one count of conspiracy to commit international money laundering and one count of conspiring to launder the proceeds of a number of securities fraud schemes. See also SEC v. Gallison, Civil Action No. 1:15-cv-05456 (S.D.N.Y. Filed July 14, 2015)(parallel enforcement action).
Improper trades: The Securities and Futures Commission suspended for four months Ernest Ho Gar, a registered representative at Fulbright Futures Limited, for permitting a friend of his mother to trade through her account. Although Mr. Ho’s mother permitted the transactions, the agency concluded that the action was not in accord with professional standards.