This Week In Securities Litigation (Week ending Nov. 25, 2016)
In a holiday shortened week, the SEC brought actions involving: a financial fraud naming against the president of the firm who, assisted by two other officers named as defendants in an earlier Commission enforcement action, used sham agreements were used to improperly inflate revenue; three proceedings involving two audit firms and one engagement partner alleging improperly professional conduct for, in one action, independence violations, and in two others, inadequate procedures which did not discover misappropriations by an investment adviser; an offering fraud involving interests in two Texas partnerships sold using a series of misappropriations; and the sale of unregistered securities sold after being acquired from an affiliate of the issuer without a registration statement being in effect.
Remarks: Chair Mary Jo White delivered remarks titled “A New Model For SEC Enforcement: Producing Bold and Unrelenting Results” at the NYU Program on Corporate Compliance and Enforcement, New York City (Nov. 2016). Her remarks emphasized an approach built on being trial ready and using techniques such as reverse proffers, data analytics, whistleblowers and admissions to speed investigations and obtain measurable results (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 2 civil injunctive case and 4 administrative proceedings, excluding 12j and tag-along proceedings.
Offering fraud: SEC v. Griffin, Civil Action No. 4:16-cv-00902 (E.D.Tex.) is an action against brothers William and Daniel Griffin, centered on an eight month offering fraud that began November 2013 and which involved their firm, Payson Petroleum, Inc. Over the period about $23 million was raised from 150 investors involving two Texas partnerships. Investors were told that Payson would contribute 20% of the offering amount up front, limit its interest to 20% and pay any costs over about $24 million. The representations were false. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The two defendants entered into partial settleds, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. In addition, they agreed to pay disgorgement, prejudgment interest and a civil penalty in amounts to be determined by the court. See Lit. Rel. No. 23694 (Nov. 23, 2016).
Unregistered securities: In the Matter of Dennis Ira Ringer, Adm. Proc. File No. 3-17697 (Nov. 23, 2016) is a proceeding which names Mr. Ringer, formerly a registered representative at several firms, as a Respondent. In May 2008 Mr. Ringer purchased four million shares of Spongetech Delivery Systems Inc. stock from RM Enterprises, Ltd., an affiliate of the company and its major shareholder that is owned by the firm’s CEO and CFO/COO. The shares were acquired at a discount to market. Almost immediately the shares, which were transferred to his account without a restrictive legend, were resold into the market, resulting in profits of $2,152,923.20. No registration statement was in effect. The proceeding alleges violations of Sections 5(a) and 5(c) of the Securities Act. To resolve the proceeding Respondent agreed to an undertaking which precludes him from acquiring a security from an affiliate and to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Respondent will pay disgorgement in the amount of the profits obtained, prejudgment interest and a penalty of $25,000.
Independence: In the Matter of PMB Helio Donovan, LLP, Adm. Proc. File No. 3-17691 (Nov. 21, 2016) is a proceeding which names as Respondents: PMB Helio, a PCAOB registered audit firm; Christopher Bauer, CPA, the lead engagement partner for the Uni-Pixel, Inc. engagements for the 2008 audit through the second quarter review of 2013, and the CFO of the audit firm from 2011 through 2013; and Jeffrey Jamieson, the engagement quality review partner for Uni-Pixel’s 2012 audit and 2012 first and second quarter reviews, as well as the managing partner of PMB Helio’s Dallas office. The proceeding centers on independence violations. Specifically, the Order alleges that the firm failed to comply with the partner rotation requirements with respect to seven issuer clients in connection with work done for the 2010 through 2013 reporting periods. This resulted in the issuance of audit reports which incorrectly stated that that the audit firm had conducted the engagements in accord with PCAOB standards. In addition, the firm failed to conduct quarterly reviews and an annual audit relating to Uni-Pixel for the year ended December 31, 2013 in accord with applicable professional standards. The Order alleges violations of Exchange Act Sections 10A(j) and 13(a) as well as the related Rules. To resolve the proceedings the firm agreed to implement a series of undertakings. Those include the retention of a consultant who will conduct a review and make recommendations related to the violations alleged. The recommendations will be implemented by the firm. In addition, each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also consented to a censure and will pay a penalty of $160,000. Each individual Respondent is denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after one year. Each will pay a penalty of $15,000.
Audit failure: In the Matter of Grassi & Co., CPAs, P.C., Adm. Proc. File No. 3017694 (November 21, 2016) is a proceeding which names as a Respondent the PCAOB registered audit firm. ClearPath Wealth Management, LLC is a Commission registered investment adviser. The adviser is the manager of several LLCs that were the general partners of five private funds. It is also the adviser to those funds under management agreements. Patrick Churchville is the principal of ClearPath. The Commission previously filed an enforcement action against the adviser and its principal. ClearPath is now run by a court-appointed receiver. Grassi was the independent auditor for several of the funds advised by ClearPath. The audit firm issued nine audit reports on the financial statements of four different funds for the years ended 2009 through 2011. Each audit report was issued in 2012. Each was unqualified. Beginning in 2010 ClearPath and Mr. Churchville defrauded the funds, according to the Order. Specifically, the adviser and its principal misappropriated investor funds and then misrepresented the value of fund assets. The audit firm failed, however, to heed indications of the fraudulent conduct, violating professional standards. This permitted the adviser and its principal to continue their wrongful conduct. The Order alleges unprofessional conduct in violation of Rule 102(e) and Advisers Act Sections 206(2) and 206(4). To resolve the proceeding the audit firm agreed to implement certain undertakings. Those undertakings include the retention of an independent consultant who will review certain policies and procedures of the firm and compile a report. The recommendations will be adopted by the firm. The audit firm also consented to the entry of a cease and desist order based on the Advisers Act Sections cited in the Order and to a censure. In addition, Grassi will pay disgorgement of $130,000, prejudgment interest and a civil penalty of $260,000. See also In the Matter of Gary R. Purwin, CPA, Adm. Proc. File No. 3-117695 (November 21, 2016)(proceeding naming the engagement partner on the ClearPath audits as the Respondent; resolved with a cease and desist order based on the Advisers Act Sections cited in the Order against the firm, an order denying the auditor the privilege of appearing and practicing before the Commission with a right to apply for reinstatement after one year, and the payment of a $20,000 penalty).
Financial fraud: SEC v. Campion, Civil Action No. 16-cv-8940 (S.D.N.Y. Filed November 18, 2016). Defendant Gavin Campion was the president of KIT Digital, Inc. At the time of the transactions here Kafeil Isaza Tuzman was the CEO of the firm and Robin Smyth was the CFO. Messrs. Tuzman and Smyth were previously named as defendants in a Commission enforcement action. Beginning in December 2010, and continuing for the next year, Messrs. Campion, Tuzman and Smyth executed a scheme in which KIT entered into at least a dozen sham licensing agreements with twelve different entities. To make it appear that KIT was generating revenue from these transactions, Messrs. Tuzman and Smyth arranged for a series of round trip cash transactions. As the scheme unfolded KIT made an offering of its securities using a shelf registration updated in October 2010. Eventually the firm restated its financial statements, had its shares delisted and filed for bankruptcy. The 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) and 13(b)(5). The case is pending. The Manhattan U.S. Attorney’s Office filed a parallel criminal action. See Lit. Rel. No. 23690 (November 18, 2016).
Program: On December 1, 2016 Dorsey will present it Third Annual Federal Enforcement Forum featuring panels discussing enforcement issues relating to the SEC, CFTC, FERC, EPA and CFPB. The program is live in Washington, DC. and video cast. No charge for registration (here).