This Week In Securities Litigation (Week ending May 8, 2015)
The debate over waivers WKSI waivers and other similar provisions continued this week. The Commission granted a WKSI waiver to Deutsche Bank despite a guilty plea to criminal felony charges but only over the dissent of Commissioner Stein.
The agency filed two civil injunctive actions this week. One ties back to the market crisis and named four former bank officials who are claimed to have falsified certain provisions related to real estate loans, concealing the true financial condition of the institution. The other involved a fraudulent investment scheme tied to so-called “man camps” to be built in the Bakken.
Finally, the controversy over the use of administrative proceedings rather than civil injunctive actions continued this week. During budget hearings before Congress Chair White is reported to have suggested that the SEC may consider guidelines regarding forum selection.
Pilot project: The SEC approved a pilot project to assess tick size impact for smaller issuers (here).
Testimony: Chair Mary Jo White testified before the Senate Subcommittee on Financial Services and General Government Committee on Appropriations regarding the fiscal year 2016 budget (here).
Waivers: The SEC granted a so-called WKSI waiver – a waiver of the disqualification from being considered a well-known seasoned issuer – to Deutsche Bank AG, despite the fact that its subsidiary pleaded guilty to criminal felony charges tied to the years long manipulation of LIBOR. Commissioner Kara M. Stein dissented (here).
Remarks: Chairman Timothy G. Massad addressed the European Union Parliament, Committee on Economics, Brussels, Belgium (May 6, 2015). His remarks, illustrated by a series of charts, focused on CCPs (here).
SEC Enforcement – Filed and Settled Actions
Statistics: During this period the SEC filed 2 civil injunctive cases and 0 administrative actions, excluding 12j and tag-along proceedings.
False statements: SEC v. Merchant, Civil Action No. 23253 (N.D. Ga.) is a previously filed action against Charles H. Merchant, Sr. and his firm, Southern USA Resources, Inc. The complaint alleged that the firm, which purportedly exploited gold mining rights in Alabama, and Mr. Merchant, its CEO, CFO, president, secretary, treasurer and director, filed false reports with the Commission regarding the value of the firm’s land. In addition, Mr. Merchant filed false certifications regarding the internal controls and his understanding of them. The company was also delinquent in its filing obligations. Previously, the Court entered a permanent injunction as to Mr. Merchant based on Exchange Act Section 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)5 and 20(a). An officer and director bar was also entered against Mr. Merchant. An injunction based on the same Sections (omitting Exchange Act Sections 13(b)5 and 20(a)) was also entered against the firm. This week the Court made findings as to monetary penalties, ordering Mr. Merchant to pay a third tier penalty of $300,000 and the firm $750,000. While the Court concluded that disgorgement was appropriate, no order was entered in view of the lack of evidence. See Lit. Rel. No. 23252 (May 7, 2015).
Market crisis: SEC v. Gibson (D. Del. Filed May 6, 2015) names as defendants: David Gibson, the former CFO of the bank; Robert Harra, Jr., its former president and COO; Kevyn Rakowski, the comptroller; and William North, the chief credit officer. Messrs. Rakowski and North were charged by the U.S. Attorney’s Office for the District of Delaware in a parallel criminal case. Years of record growth resulted in a loan balance of over $9 billion in 2009 for the Bank. As the credit crisis continued, and the housing market deteriorated, many of the construction projects underlying the Bank’s loans stalled. Others matured and the principal became due. As these events unfolded the Bank failed to classify these loans as non-accruing. To the contrary, the Bank continued to accrue or record income as if payment was expected. The bank also did not disclose, for the most part, this fact. In the third quarter of 2009 the Bank disclosed only $38.7 million of these loans, omitting about $351 million. In the fourth quarter of that year actions by the four defendants resulted in the omission of about $330.2 million of these loans. Disclosures for that quarter reflected only $30.6 million in matured loans 90 days or more past due. Mr. Gibson’s actions are also alleged to have resulted in the failure by the Bank to disclose significant events which occurred after the close of the quarter but prior to the completion of the financial statements for the third quarter and year end, contrary to GAAP. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and13(b)(5). The action is pending. See Lit. Rel. No. 23254 (May 7, 2015).
Investment fund fraud: SEC v. North Dakota Developments, LLC, Civil Action No. 4:15-cv-00053 (D.N.D.) is an action against the firm and its principals, Robert Gavin and Daniel Hogan. The defendants are alleged to have raised over $62 million from hundreds of investors to develop “man camps” in the Bakken oil fields. Investors were promised returns as high as 42% or guaranteed returns of up to 24%. The first camp failed while the second was developed but Ponzi type payments were made to investors. Much of the money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The Court granted a temporary freeze order. A hearing on a preliminary injunction is scheduled for May 18, 2015. See Lit. Rel. No. 23252 (May 6, 2015).
Investment fund fraud: SEC v. Pameijer, Civil Action No. 1:12-cv-01364 (S.D. Ind.) is a previously filed action against Rudolf Pameijer and his daughter, Lindsay Sayer. The complaint alleged that the two defendants assisted co-defendant Ryan Koester, who falsely claimed to be an expert currency trader, to secure investor funds. Mr. Koester previously settled. Mr. Pameijer and Ms. Sayer solicited clients to invest in promissory notes that claimed to have a guaranteed return with no risk. In fact the father-daughter combination misappropriated most of the investor funds raised while the remaining were given to Mr. Koester who lost them through trading. The Court entered an order based on the settlement of the two defendants, enjoining them from future violations of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, Mr. Pameijer agreed to pay disgorgement of $1,226,703 along with prejudgment interest but no civil penalty in view of his sentence in the parallel criminal case. Ms. Sayer agreed to pay disgorgement of $90,822 along with prejudgment interest. A penalty was waived based on financial condition. See Lit. Rel. No. 23251 (May 1, 2015).
Audit committee: The Board issued the first of what is planned as a series called Audit Committee Dialogue. The series is based on insights from inspections of public company auditors that may prove beneficial to audit committee members. It includes a discussion of key recurring areas of concern and risks the Board in monitoring (here).
Misappropriation: The Australian Securities and Investment Commission announced that Anthony Nicholis, a director of Zantholis International Pty Ltd pleaded guilty to three charges of dishonesty tied to misusing firm funds. Specifically, the companies raised about $2.68 million from about 20 investors. The funds were to be used for property developments. Between 2004 and 2006 Mr. Nicholis authorized the withdrawal of over $750,000 from the funds raised for his personal benefit. The date for sentencing has not been set.
Bar order: The Securities and Futures Commission, following an investigation, barred Benjamin Zhiwei, formerly a representative at JPMorgan Chase Bank, from the securities business. The action was based on the fact that he concealed from his firm a personal securities trading account and his interest in the account of a friend. During that period the accounts held positions which were on the restricted list of the firm.
Investment fund fraud: The SFC resolved proceedings regarding the Descartes Athena Fund SPC or the Athena Fund, a hedge fund based in the Cayman Islands. In April 2009 the SFC instituted proceedings against the fund and others based on allegations that the management defrauded investors. A freeze order was obtained, a receiver appointed and the assets traced. Now the SFC has recovered about $191,360, 215 for investors.