The Commission prevailed at trial this week, securing a favorable verdict after a two week jury trial. The action centered on false statements made by an executive regarding regulatory approvals for the only drug of the company.
The agency also filed two offering fraud actions, one of which centered on selling shares in private companies which supposedly held warrants to acquire shares of another private company. In addition, the SEC brought two audit failure actions and an insider trading case against a corporate executive.
Rules: The Commission adopted amendments to implement the JOBS Act and FAST Act Changes for Exchange Act Registration Requirements (here).
SEC Enforcement – Litigated Actions
False statements: The SEC prevailed at trial against the former CEO of a biopharmaceutical company on claims that he made false and misleading statements regarding the regulatory approval status of the firm’s only drug. Following a two week trial the jury returned a verdict finding the former executive – Stephen Ferrone — liable for violating Exchange Act Section 10(b). The jury also concluded that the executive was not liable for aiding and abetting the firm’s failure to file annual, quarterly and current reports that were accurate and not materially misleading under Exchange Act Section 20. SEC v. Ferrone, Civil Case No. 1:11-cv-05223 (N.D. Ill. Filed Aug. 1, 2011).
The case centered on the regulatory status of drug SF-1019, the only drug of Immunosyn Corporation. The California based company, whose shares are registered with the Commission and quoted on the OTCBB, was formed to market, distribute and sell the drug. SF-1019 is derived from goat blood. It had the potential to treat a variety of ailments, including HIV and diabetic neuropathy. The company was named as a defendant along with Argyll Biotechnologies, LLC, the firm’s major shareholder, two other shareholder entities, CEO Stephen Ferrone, CFO Douglas McClain Jr., Chief Scientific Officer Douglas McClain, Sr. and Argyll’s CEO James Miceli. Immunosyn stated in public filings over a four year period beginning in 2006 that Argyll, which controls SF-1019, planned to commence the regulatory approval process for human clinical trials in the U.S. Yet the FDA had twice halted any efforts to initiate those trials. The FDA actions, however, were not disclosed until April 2010. During this period Messrs. Ferrone and McClain, Jr. signed and certified public filings by the company which contained the false statements. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 16(a) and 20(a). See Lit. Rel. No. 23528 (May 3, 2016).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 4 civil injunctive actions and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Financial fraud: SEC v. Apuzzo, Civil Action No. 3:07-cv-1910 (D. Ct.) is a previously filed action against Joseph Apuzzo, former CFO of Terex Corporation and others. The SEC’s complaint alleged that Mr. Apuzzo aided and abetted a fraudulent accounting scheme involving two sale-leaseback transactions that were structured to improve the revenue of United Rentals, Inc. Previously he consented to the entry of a permanent injunction based on Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5). He also agreed to pay a penalty of $100,000. After a hearing the court entered an order barring him from serving as an officer or director. The court based its order on the egregious nature of the conduct, the high degree of sciener and the likelihood the conduct would reoccur since Mr. Apuzzo failed to recognize the wrongful nature of the conduct. See, Lit. Rel. No. 23531 (May 5, 2016).
Offering fraud: SEC v. Trolice, Civil Action No. 16-cv-02513 (D. N.J. Filed May 4, 2016). The complaint names three individuals as defendants: James Trolice, Lee Vaccaro and Patrick MacKaronis. Mr. Trolice served as President and Chief Marketing Officer of eAgency, Inc. from May 2006 through early 2007 after which he continued as a consultant and finder for the firm. He also created Trolice Consulting, a limited liability company. Mr. Vaccaro served as Chief Marketing Officer and V.P. of Investor Relations for eAgency from July 2009 through October 2013 and, thereafter, as a consultant and finder. He also created three limited liability companies — Vaccaro Consultant, Vacaro Consultants, and Vaccaro Consultants. Mr. Mackaronis was previously a registered representative. Beginning in 2009, and continuing into 2014, the Messrs. Vaccaro and Trolice used the LLCs they created to solicit investors, claiming the entities held eAgency warrants. Overall $6 million was raised from about 100 investors. Typically Messrs. Trolice and Vaccaro told potential investors about the eAgency warrants, that they could be used to purchase shares of the technology start-up company and that there were only a limited number available. Since eAgency was about to have a significant liquidity event such as being acquired, the share price would jump to a high multiple shortly. The way to take advantage of this opportunity, according to the sales pitch, was to purchase an interest in the LLC. The claims were false. Mr. Mackaronis was central to the effort. He solicited his family members, friends and customers for investments in Trolice Consulting. Overall he earned $85,000 in commissions after having invested $9,000 himself in the firm. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1) and (2). Mr. Mackaronis agreed to settle with the Commission. He will pay disgorgement of $85,000, prejudgment interest and a $50,000 penalty. In addition, he agreed to the entry of an order baring him from the securities industry for three years. The U.S. Attorney’s Office for the District of New Jersey filed a parallel criminal case against Mr. Vaccaro. The New Jersey Bureau of Securities also filed civil charges against Messrs. Trolice, Vaccaro and Mackaronis. See Lit. Rel. No. 23532
Insider trading: SEC v. Dubovoy, Civil Action No. 2:15-cv-06076 (D.N.Y.) is a previously filed action against, among others, Oleksandr Makarov. The action centers on hacking news releases. Mr. Makarov made about $80,000 buying and selling shares based on the information obtained between 2012 and 2014. He agreed to settle with the Commission, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b) and Securities Act Section 17(a). He agreed to pay disgorgement of $100,000. The SEC has now recovered over $52 million in this action and secured injunctions against 11 defendants. See Lit. Rel. No. 23530 (May 4, 2016).
Audit failure: In the Matter of MaloneBaily, LLP, Adm. Proc. File No. 3-17240 (May 2, 2016) is a proceeding which names as Respondents the Audit firm and Jay Norris, CPA, a partner at the firm. The audit firm conducted the audits of Left Behind Games, Inc. for the fiscal years ended March 31, 2010 and 2011. Mr. Norris was the engagement partner. About 80% of the firm’s revenue came from one client in a fraudulent transaction between the two firms whose senior executives were friends. Left Behind was the subject of a Commission enforcement proceeding for fraudulent accounting. The Order stated that in auditing LBG for the fiscal year 2011 Respondents’ conduct violated professional standards and they engaged in improper professional conduct after gaining the firm as a client, learning it may have engaged in illegal conduct and then not complying with PCAOB standards in conducting the work. The Order alleged violations of Rule 2-02(b)(1) of Regulation S-X. To resolve the proceeding the firm agreed to implement a series of undertakings. Each Respondent consented to the entry of a cease and desist order based on the Rule cited in the Order and the firm was censured. Mr. Norris was denied the privilege of appearing and practicing before the Commission as an accountant with the right to reapply after three years. In addition, the firm will pay disgorgement of $54,000 along with prejudgment interest and a penalty of $100,000. Mr. Norris will pay a penalty of $10,000.
Insider trading: SEC v. Nunan, Civil Action No. 5:16-cv-02373 (N.D. Cal. Filed May 2, 2016). Peter Nunan was a Senior Engineering Fellow at Screen SPE USA, a subsidiary of Screen Holdings Co., Ltd. Screen Holdings is a Japanese semiconductor equipment company. This action centers on the acquisition by Tokyo Electron of FSI International, Inc., a Minnesota based supplier of semiconductor equipment services, announced on August 13, 2012. By December 2011 Tokyo Electron was in negotiations to acquire FSI. By August 2012 substantial steps had been taken toward the commencement of a tender offer. Beginning in February 2012 a member of FSI’s board of directors who had a professional relationship with Mr. Nunan informed him about the negotiations. The discussions between the two continued into August 2012. They were intended to be confidential. The information was disclosed to permit Mr. Nunan to try and obtain a competing bid. Mr. Nunan furnished the information to the executive at Screen Holdings responsible for evaluating a potential competing bid. Ultimately Screen Holdings chose not to submit a bid. During the time he was receiving information on the proposed tender offer, Mr. Nunan purchased shares of FSI. Specifically, between February 14 and August 9, 2012 he acquired 105,000 shares of FSI. He also recommended that his brother purchase shares. On July 23, 2012 his brother bought 1,000 shares. Following the announcement of the tender offer, the share price increased 50%. Mr. Nunan sold most of his FSI stock the next day. He had realized and unrealized profits of $254,858. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Mr. Nunan resolved the matter, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to the entry of an order requiring him to pay $254,858 in disgorgement, prejudgment interest and a penalty equal to the amount of the disgorgement.
Offering fraud: SEC v. Moore, Civil Action No. 3:16-cv-208 (W.D. N.C. Filed May 3, 2016) is an action which names as defendants George Moore III, the former CEO of Solarbrook Water and Power Corporation, and Joseph DeRosa. The two men caused the firm to issue over 10 million restricted shares of stock under a falsified consulting agreement and a backdated debenture. A falsified attorney opinion letter was submitted to the transfer agent to induce the sale of the stock. Misrepresentations were then made to a broker that resulted in the shares being sold into the market. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the action each defendant consented to the entry of a judgment of permanent injunction prohibiting future violations of the Sections cited in the complaint. The order also bars them from participating in any penny stock offering. The judgment, in addition, orders the two defendants to pay, jointly and severally, disgorgement and prejudgment interest of $30,570. Mr. DeRosa will also pay a civil penalty in the amount of $26,175. The judgment against Mr. Moore bars him from serving as an officer or director of any public company.
Kickbacks: SEC v. Julien, Civil Action No. 1:16-cv-2193 (E.D.N.Y. Filed May 3, 2016) is an action which names as defendants Richard St. Julien, Jared Mitchell, Christopher Castaldo, Louis Petrossi, Herschel Knippa and a group of five registered representatives. The action centers on three fraudulent schemes: 1) Beginning in October 2014, and continuing until the next spring, Mr. Julien, the ex-Chairman of ForceField Energy, Inc. whose shares were traded on the NASDAQ Capital Market, hired a so-called investor relations professional to pay cash kickbacks to the registered representative defendants to recommend the stock of ForceField. Second, from June 2012 and January 2014 Mr. St. Julien paid kickbacks to defendant Castaldo, a former registered representative, to solicit investors to buy ForceField stock. He touted the stock without disclosing the payments. Third, from December 2009 to April 2015 Mr. St. Julien paid defendants Knipa and Petrossi, who were not registered representatives, kickbacks in exchange for soliciting investments in ForceField’s private placements of common stock and warrants. The two men touted the stock and its merits but failed to disclose the kickbacks. The complaint alleges violations of Securities Act Section 5, each subsection of Section 17(a) and Section 17(b) and Exchange Act Sections 10(b) and 15(a). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York filed a parallel criminal action.
Custody rule: In the Matter of Santos, Postal & Company, P.C., Admin. Proc. File No. 3-17238 (April 29, 2016). Respondents in the action are the PCAOB registered audit firm Santos, Postal and Joseph A. Scolaro, a C.P.A. who owned 25% of the firm. He served as the engagement partner for SFX Financial Advisory Management Enterprises, Inc., an SEC registered investment adviser during the period. SFX Financial is subject to a Commission cease and desist order based on violations of Advisers Act Sections 206(1), 206(2) and 206(4) for failing to supervise Brian J. Ourand, formerly an employee of the firm who was terminated for misappropriating client funds. SFX specialized in providing advisory and financial management services to high net-worth individuals. Santos, Postal began providing auditing services to SFX in 2004. From 2006 through 2011 Mr. Ourand misappropriated funds from client accounts. During the period he wrote unauthorized checks from client bank accounts payable to “cash” or himself. He also wired unauthorized amounts to himself for personal use. In preparing reports for 2010 and 2011 the firm failed to adequately consider the risks and the lack of segregation in duties. In 2011 it failed to consider the misappropriations it had been informed about. In both periods the audit firm represented in its reports that they had been prepared in accord with AICPA standards when in fact they were not. The Order alleges a violation of Advisers Act Section 207. It also finds that the firm and Mr. Scolaro engaged in improper professional conduct. To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. The firm and Mr. Scolaro were each denied the privilege of appearing and practicing before the Commission with the right to apply for reinstatement after, respectively, one year and five years. The firm was also ordered to pay disgorgement of $25,800 and prejudgment interest. Mr. Scolaro was directed to pay a penalty of $15,000.
Sales practices: The regulator fined MetLife Securities, Inc. $20 million for making negligent misrepresentations and omissions in connection with variable annuity replacements. MetLife will also pay $5 million to customers. Variable annuities are complex products. To replace one with another requires consideration of a number of factors. The replacement is subject to certain regulatory requirements. From 2009 through 2014 the firm omitted at least one material fact relating to the costs and guarantees of customers’ existing contracts in 72% of the 35,5000 replacement contract applications it approved based on a sample of transactions.
Insider trading: U.S. v. Stewart (S.D.N.Y.) is an action in which Robert Steward previously pleaded guilty to one count of conspiracy to commit securities fraud and fraud in connection with a tender offer. Over a period of about four years Mr. Steward was part of an insider trading ring that made about $1.16 million. Mr. Steward had profits of about $150,000. At the center of the ring was his son Sean who was a vice president in the healthcare investment banking group of a global bank headquartered in Manhattan. Mr. Steward was sentenced to serve four years probation with the first year in home confinement and pay $150,000 in forfeiture.
Recordings: The Securities and Futures Commission reprimanded Solid King Securities Ltd. and fined the firm $700,000 for failing to comply with the telephone recording requirements from May 2013 to January 2014 as to one phone line. The requirement is designed to ensure that customer orders are recorded.