This Week In Securities Litigation (Week ending March 6, 2015)

The SEC continued Operation Shell-Expel this week, suspending trading in the shares of 128 OTC issuers bringing its total for the program to about 8% of the shares traded in that market. The Commission also announced another whistleblower award, this time to a former company officer in the amount of $475,000 to $575,000.

The agency brought enforcement actions this week involving: A failure to supervise; making false reports in an effort to avoid having an issuer delisted; a fraudulent loan scheme; accounting controls; a manipulation by a recidivist; and the payment of kickbacks.


Trading suspensions:The Commission halted trading in the shares of 128 issuers described as part of Operation Shell-Expel. Since that operation began in 2012 trading suspensions have been issued for over 800 microcap stocks. That represents about 8% of the OTC traded stocks. While trading could begin again if certain requirements are met, it is “extremely rare” for that to occur, according to the Commission.

Whistleblowers: The Commission awarded between $475,000 and $575,00 to a former company officer who reported original, high-quality information about a securities fraud which resulted in an enforcement action with sanctions exceeding $1 million.

Remarks: Andrew Ceresney, Director, Division of Enforcement delivered remarks at CBI’s Pharmaceutical Compliance Congress, titled FCPA, Disclosure, and Internal Controls Issues Arising in the Pharmaceutical Industry, Washington D.C. (March 3, 2015). His remarks focused on FCPA cases in the pharmaceutical sector, compliance, self-reporting and strong internal controls (here).


Remarks: Chairman Timothy G. Massad delivered the Keynote Address before the Institute of International Bankers (March 2, 2015). His remarks focused on recent agency work in the swaps market and the agenda going forward which includes a margin rule for uncleared swaps, cross-boarder issues, clearinghouse strength and stability and cybersecurity (here).

Supreme Court

Destruction of evidence: Yates v. United States, No. 13-7451 (S.C. 2015) is a decision in which the Court construed Section 1519, passed as part of the Sarbanes-Oxley Act.

The Section provides in part that “[w]hoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a fake entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the proper administration of any matter within the jurisdiction of any department or agency of the United States . . .” may be fined or imprisoned for up to twenty years. The question decided by the Court was whether the phrase “tangible object” covered any object – here an undersized fish disregarded after the defendant who caught it was found to have violated the law – or is limited by the context of the statute. The Court concluded that the meaning of the phrase was limited by the text of the statute and its origins which focused on destroying documents and similar items. The Court held that a tangible object captured by Section 1519 must be one “used to record or preserve information.”

M&A Suits

The percentage of M&A deals challenged by shareholder suits remained largely constant last year while the number of suits filed against each deal declined slightly, according to a recent report by Cornerstone Research (here). In 2014 about 93% of the deals were challenged in litigation compared to 94% in the prior year and 93% in 2012 and 2011. The number of suits per deal declined in 2014 however. Last year there were 4.5 suits filed per deal. That compares to 5.2 in 2013, 4.8 in 2012 and 5.4 in 2011. In contrast with prior years, during 2014 60% of the M&A suits were filed in one jurisdiction. This is the reverse of prior years and is probably the result of forum selection clauses, according to the report. Only four percent of the deals were challenged in more than three jurisdictions, down from the peak of 20% in 2011. The cases were concentrated in five jurisdictions: Delaware where 74 cases were filed; California at 22; New York at 10; Maryland at 10; and Michigan with 6. Most of the M&A suits were resolved by closing as in prior years, although the percentage declined in 2014. Last year 59% of the suits were resolved by closing compared to 74% in 2013, 78% in 2012 and 73% in 2011. Finally, of the 78 settlements reached in 2014 for which Cornerstone had data, only 6 involved the payment of monetary consideration. About 80% of the settlements reached in 2014 provided only for disclosure.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 3 civil injunctive action and 3 administrative proceedings, excluding 12j and tag-along-actions.

Failure to supervise: In the Matter of H.D. Vest Investment Securities, Inc., Adm. Proc. File No. 3-16419 (March 4, 2015) is a proceeding alleging that the Texas based broker-dealer failed to supervise registered representatives who transferred client funds to from their accounts for their own personal benefit. In addition, the firm failed to establish the proper reserves to repay customers and to have an effective email policy since representatives were permitted to use personal accounts on condition that business communications were sent to the firm which was not always the case. As a result the firm failed to effectively maintain emails as required. The Order alleges violations of Exchange Act Sections 15(c)(3) and 17(a). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, it will comply with certain undertakings, including the retention of a consultant, and pay a penalty of $225,000.

False reports: SEC v. China Infrastructure Investment Corp., Civil Action No. 1:15-cv-00307 (D.D.C. Filed March 3, 2015) names as defendants the firm, a Nevada company engaged in the construction of a road in China, and two of its officers, Wang Feng, the corporate secretary, and Li Xipeng, the CEO. Three months after becoming CFO in June 2011 Li Lei resigned, effective immediately. At the time the firm was appealing a NASDAQ decision to delist it for failing to maintain a share price of $1.00. Accordingly, Mr. Feng falsely reported that Mr. Lei had decided to remain on at the firm for a transition period. Mr. Feng was concerned about the impact of the resignation on the share price. The firm sent correspondence to NASDAQ and its auditors bearing Mr. Lei’s forged signature to effectuate the scheme. The complaint alleges violations of Exchange Act Sections 10(b) and 13(a). The case is pending. See Lit. Rel. No. 23214 (March 14, 2015).

Fraudulent lending scheme: SEC v. Alyasin, Civil Action No. 4:15-cv-00566 (S.D.Tx. Filed March 3, 2015) is an action which names as defendants Optima Global Financial, Inc. and its CEO Ahmad Fnaikher Alyasin. A related administrative proceeding names their attorney, Gary Patterson, as a Respondent. The complaint and Order alleges that from September 2010 through March 2011 the firm and its CEO engaged in a fraudulent scheme to obtain and sell shares of China North East Petroleum Holdings Limited. Mr. Alyasin and Optima agreed to loan $3.5 million to a director of North China. The loan was collateralized by restricted shares of the firm. Nevertheless, Optima and Mr. Alyasis, using false Rule 144 letters prepared by Mr. Patterson, immediately sold the unregistered shares into the market. The complaint alleges violations of Securities Act Sections 5(a) and (c) as well as 17(a) and Exchange Act Section 10(b). Mr. Alyasis and Optima agreed to partially resolve the case, consenting to the entry of a permanent injunction based on the Sections cited in the complaint and to pay disgorgement and a penalty in amounts to be determined later. Mr. Patterson consented to the entry of a cease and desist order based on the same Sections, agreed to pay a civil penalty of $30,000 and is prohibited from providing professional legal services to any person or entity in connection with the offer or sale of securities. See also Lit. Rel. No. 23213 (March 3, 2015).

Sale unregistered securities: SEC v. Inofin, Inc., Civil Action No. 1:11-cv-10633 (D. Mass.) is a previously filed action against, among others, Kevin Keough, a former registered representative, and his wife, Nancy Keough. The action centered on the sale of the unregistered shares of Inofin, Inc. through which about $110 million was raised. Previously the court granted summary judgment against Ms. Keough. Mr. Keough settled the action. The judgment against Mr. Keough permanently enjoins him from violating Exchange Act Section 15(a) and Securities Act Sections 5(a) and (c). In addition, it requires him to pay disgorgement, along with his wife, of $368,430 and prejudgment interest. The Court is considering the question of a penalty. See Lit. Rel. No. 23212 (March 3, 2015).

Accounting controls: In the Matter of Robert W. Elliot, Adm. Proc. File No. 3-16413 (March 2, 2015) is a proceeding which names as a Respondent Robert Elliot, the vice president of finance at Michael’s Finer Meats, LLC, a subsidiary of The Chefs’ Wharehouse, Inc. from August 2012 through January 2014. During the period Mr. Elliot rolled up the inventory as part of his duties from a physical count taken by the staff. He then analyzed profit trends. If there was a distortion he would review the count. In some instances he discovered a discrepancy and had it corrected. In others he did not. When errors were discovered Mr. Elliot adjusted the inventory but failed to maintain supporting papers. In some instances when he was unable to identify count errors he adjusted the inventory. Those adjustments caused the financial statements filed for the third quarter of 2012 and in the annual report for that year to be inaccurate. The reports for the first three quarters of 2013 were also inaccurate. Since the aggregate overstatement of inventory was about $905,000 the firm disclosed the issue and made the adjustments without a restatement. The order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(5). Mr. Elliot resolved the matter, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to pay a civil penalty of $25,000.

Manipulation:SEC v. Williky, Civil Action No. 15-cv-357 (S.D. Ind. Filed March 2, 2015). This action focused on the manipulation of the shares of Imperial Petroleum, Inc. by Gary Williky. The firm, a defendant in another SEC enforcement action, supposedly made and sold biofuel, reaping significant tax credits in the process. Mr. Williky, a defendant in two prior SEC enforcement actions, was retained to conduct investor relations. Following his retention, Mr. Williky engaged in a series of wash sales and matched orders to inflate the price of the shares. He also touted the stock in e-mails while selling it. During his work with the company, Mr. Williky discovered that its business was a fraud. The company did not manufacture bio-fuel. It purchased the substance and resold it. Accordingly, it was not entitled to the tax credits it obtained. Rather than report the fraud to the authorities, Mr. Williky demanded and obtained a block of stock from the firm in return for his silence. He then sold the shares into the market. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(1), 10(b) and 13(d). The case is pending. See Lit. Rel. No. 23211 (March 2, 2015).

Kickbacks: In the Matter of Hajime Sagawa, Adm. Proc. File No. 3-16412 (February 27, 2015). Hajime Sagawa was a registered representative and a founding member, minority owner and a director of Axes America, LLC, a registered broker-dealer. This proceeding centers on efforts to conceal millions of dollars in losses at Olympus Corporation, a manufacturer and seller of cameras, microscopes, endoscopes and other medical equipment. To conceal certain operating loses sustained in the mid-1980s, Olympus supplemented its income with speculative investments. When those incurred losses two executives transferred them to off-shore entities. Following the completion of the transactions, Olympus needed to create a mechanism to repay the banking entities that financed the sales. The two executives planned to accomplish this by diverting portions of the payments that would be made for the next acquisition by Olympus to the banks.

To implement the scheme, one of the two executives executed an investment banking agreement with Axes after meeting with Mr. Sagawa. Under the terms of the agreement Axes would serve as financial adviser for the acquisition of two possible targets. The agreement called for an outsized investment banking fee. Olympus then acquired Gyrus Group PLC, a U.K firm that specialized in endoscopes. Following the closing of that deal in February 2008 Olympus paid Axes an advisory fee in the form of cash and Gyrus preference shares valued at about 38% of the purchase price. Two years later Olympus purchased those shares from Axes and an affiliate. The $662 million purchase price, along with other portions of the fees paid to the broker-dealer, were channeled to the off-balance sheet entities to repay the bank loans. The Order alleges violations of Securities Act Sections 17(a) and (c) and Exchange Act Sections 15(c)(1)(A). It also acknowledged the cooperation of Respondent. Mr. Sagawa resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He will also be barred from the securities business and from participating in any penny stock offering. No penalty was imposed in view of Respondent’s cooperation.

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