This Week In Securities Litigation (Week ending May 26, 2016)

In a holiday shortened week the Commission brought actions centered on: a transfer agent and one of its owners who conducted a fraudulent offering for another company and then sold unregistered shares into the market; a market manipulation that employed a false Section 13(d) filing used to artificially inflate the share price of a stock so the manipulator could sell options at a profit; and a financial fraud in which senior finance officers took advantage of the firm’s lack of effective internal controls to manipulate key financial statement metrics.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC filed 3 civil injunctive actions and 2 administrative proceedings, excluding 12j and tag-along proceedings.

Misrepresentations/unregistered offering: In the Matter of American Registrar & Transfer Company, Adm. Proc. File No. 3-17260 (May 25, 2016). Respondent American Registrar is a transfer agent. Respondent Christopher Day is a vice president and minority owner of the firm. In September 2010 RVPlus, then a firm whose shares were quoted on OTC Link, filed a registration statement with the Commission. It was signed by Mr. Day as the CEO and majority shareholder. The registration statement did not disclose that an unnamed Promoter actually controlled the firm and beneficially owned the shares held in Mr. Day’s name. In fact Mr. Day had agreed to serve as a nominee. In May 2012 Mr. Day assisted Promoter in selling most of RVPlus’ shares to Cary Peterson who then became the CEO of the firm. Mr. Day transferred at least 4 million shares to transferees of Mr. Peterson in a manner which disguised the fact that Mr. Peterson had directed the transaction. American Registrar enabled the unlawful re-sale of almost 500,000 unregistered shares of stock. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the case American Registrar agreed to implement certain undertakings, including the retention of an independent consultant. The firm also consented to the entry of a cease and desist order based on Section 5 of the Securities Act and to a censure. The firm will pay disgorgement of $585, prejudgment interest and a civil penalty of $25,000. Mr. Day consented to the entry of a cease and desist order based on the two antifraud sections cited in the Order. He is also barred from serving as an officer or director of an issuer for three years and barred from the securities business and from participating in any penny stock offering with a right to reapply after three years. He will pay disgorgement of $30,000, prejudgment interest and a penalty equal to the amount of the disgorgement.

Manipulation: SEC v. Aly (S.D.N.Y. Filed May 24, 2016). Defendant Nauman Aly is a resident of Pakistan. In mid-April 2016 he is alleged to have manipulated the share price of Integrated Devices Technology, Inc. or IDTI, a high tech firm based in San Jose, California. Specifically, on April 12, 2016 he: 1) purchased out of the money call options for the stock; 2) filed a Schedule 13D with the SEC claiming a group had acquire 5.1% of the stock and was about to make a tender offer for all shares; 3) and sold the options for a profit of over $400,000 minutes after the filing was made droving up the share price. Shortly after the sale Mr. Aly is alleged to have filed a second Schedule 13D stating the group no longer owned over 5% because the options were sold. The company never received an offer, contrary to the representations in the first Schedule 13D filed. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission obtained a freeze order over the trading profits on filing. The case is pending.

Financial fraud: In the Matter of Swisher Hygiene, Inc., Adm. Proc. File No. 3-17257 (May 24, 2014). The firm is a North Carolina hygiene and sanitation company. The financial fraud involved CFO Michael Kipp, Director of External Reporting Joanne Viard and Director of Financial Planning John Pierrard. In 2011 the firm actively acquired companies during a period when it lacked effective internal controls. Mr. Kipp directed that accounting entries be made which aggressively reevaluated and manipulated various acquisition-related reserves and expenses to increase earnings to certain targets tied to the expectation of firm lenders. As a result the firm issued quarterly reports beginning in the second quarter of 2011 which were materially false and misleading. The firm benefited by being able to use its artificially inflated stock price to make acquisitions. The Order alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company agreed to cooperate with the SEC on an on-going basis. It also consented to the entry of a cease and desist order based on the Sections cited in the Order. Imposition of a penalty was waived based on the $2 million penalty paid in the parallel criminal action. See U.S. v. Swisher Hygiene Inc., Case No. 3:15-cr-237 (W.D.N.C)( resolved with a deferred prosecution agreement). See also SEC v. Kipp, (W.D.N.C. Filed May 24, 2016)(action against former CFO and director of external reporting alleging violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)-5, 20(a) and 21F); SEC v. Pierrard (W.D.N.C. Filed May 24, 2016)(action against former director of financial planning alleging violations of Securities Act Section 17(a)(1) and Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)-5).


Remarks: Richard G. Ketchum, Chairman and CEO, delivered remarks titled “Commerce and Compliance: It’s Not a Culture War” at the 2016 FINRA Annual Conference, Washington, D.C. (May 23, 2016). His remarks focused on culture and compliance (here).

Hong Kong

MOU: The Securities and Futures Commission entered into a memorandum of understanding with FINRA concerning mutual assistance in the supervision and oversight of regulated entities that operate on a cross-boarder basis in Hong Kong and the U.S.


Report: The Financial Conduct Authority issued a Research Report into the de-risking of banks (here).

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