This Week In Securities Litigation (Week ending Nov. 3, 2017)
The Commission’s focus on retail investors is reflected in cases filed this week. One involved the manipulation of securities prices by gaining unauthorized access to retail accounts and then trading securities. Another involved charging customers excessive fees by Merrill Lynch representative. Another against UBS centered a charge that the firm had inadequate procedures to ensure that its customers received information on the lowest price fund shares.
Remarks: Stephanie Avakian, Co-Director, Division of Enforcement, delivered remarks titled The SEC Enforcement Division’s Initiatives Regarding Retail Investor Protection and Cybersecurity, Washington, D.C. (Oct. 28, 2017). Moving forward, according to the Co-Director, the Retail Strategy Task Force will focus on issues that impact retail investors, operating in conjunction with OCIE, DERA and other divisions while the cyber unit will concentrate on issues in that area; this is not at the expense of financial fraud and insider trading cases she noted (here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 4 civil injunctive case and 3 administrative proceedings, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Lollar, (W.D. Tx. Filed Nov. 1, 2017). Christopher Lollar was a petroleum engineer for Apache Corporation from January 2014 through June 2017. Apache is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. The firm’s shares were traded on the New York Stock Exchange. Beginning in 2014, and continuing through mid-2016, Apache sought to develop the Alpine High resource play. By July 14, 2016 the play was developed. Following a board presentation by the group of engineers with whom Mr. Lollar worked – he was not in the meeting – the firm decided to announce the findings. A press release was drafted between August 25, and September 2, 2016 which was to be issued on September 7. Prior to the issuance of the press release Mr. Loller purchased 461 shares of Apache in one brokerage account and 490 call options with an expiration date of September 9 in the other. When the share price increased about 6.7% after the announcement Mr. Lollar had total trading profits of about $211921.00. The complaint alleged violations of Exchange Act Section 10(b). To resolve the action Mr. Lollar agreed to pay disgorgement of $214,295.07, prejudgment interest and a penalty equal to the amount of the disgorgement.
Rule 105-short selling: In the Matter of Millennium Management LLC, Adm. Proc. File No. 3-18272 (Oct. 31, 2017) is a proceeding which names the registered investment adviser as a Respondent. Between February and November 2012 the adviser sold stock short within the Rule 105 restrictive period and then purchased shares of the same stock in a covered offering in four instances. The firm did not qualify for an exemption. As a result it made profits of over $286,000 for the firm’s advisory clients. The Order alleges violations of Rule 105 of Regulation M of the Exchange Act. To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Rule cited in the Order. In addition, the adviser will pay disgorgement of $286,889, prejudgment interest and a penalty of $300,000.
Excessive fees: SEC v. Buck, Civil Action No. 1:17-cv-03984 (S.D. Ind. Filed Oct. 31, 2017) is an action against Merrill Lynch registered representative and investment adviser Thomas Buck. Mr. Buck had a large book of business with his own team and several hundred accounts. Merrill had two fee options. Under the commission-based option the customer was charged a commission for each transaction. Under the fee-based option clients were charged an annual fee that was a fixed percentage of their total assets under management regardless of the number and percentage of the client’s total assets. The firm’s procedures encouraged the financial advisors to evaluate the options, inform the client and encourage the selection of the lowest cost one. From 2012 through early 2015 Mr. Buck misrepresented to a number of customers that their total annual commissions would not exceed certain limits. When the commissions did exceed those limits he made misrepresentations to the customers and the firm to conceal the fact. He also engaged in unauthorized trading. As a result he made an additional $2.5 million in commissions. The complaint alleges violations of Exchange Act Section 10(b), each subsection of Securities Act Section 17(a) and Advisers Act Sections 206(1) and 206(2). A parallel criminal action was filed by the U.S. Attorney’s Office for the Southern District of Indiana. See Lit. Rel. No. 23974 (Oct. 31, 2017).
Account intrusion/manipulation: SEC v. Willner, Civil Action No. 1:17-cv-06305 (E.D.N.Y. Filed Oct. 30, 2017). Defendant Joseph Willner is a day-trader. He coordinated with an unidentified person called Individual A. Over a two year period beginning in January 2014 Mr. Willner and Individual A repeatedly manipulated the share price of stocks using two sets of accounts. One group belonged to Mr. Willner. The second group were retail investors whose accounts were used without authorization by Individual A. Over the period the two traders reaped about $700,000 in trading profits. To generate gains Individual A would access retail accounts without permission. He would then cause the accounts to place orders to either artificially raise or lower the price of select stocks. Mr. Willner would then execute trades on the opposite side through his accounts. In exchange for participating in the scheme Individual A received half of the trading profits. To coordinate and conceal their activities Mr. Willner disguised his real identity when communicating with Individual A. He did this by using a pseudonym. He accessed the direct messaging applications using the pseudonym but with the IP address associated with his primary residence. In order to try and mask the payments to Individual A, Mr. Willner transferred proceeds from profitable trades to a digital currency company that converted U.S. dollars to bitcoin. The payment was then made to Individual A in bitcoin. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York filed a parallel criminal action.
Manipulation: SEC v. Madsen, Civil Action No. 1:17-cv-08300 (S.D.N.Y. Filed Oct. 27, 2017) is an action which names as defendants John Madsen, a convicted felon and former securities law violator, and Bernard Fried. Beginning in November 2013, and continuing for the next several months, the defendants attempted to conduct a pump-and-dump manipulation of the shares of Andalusian Resorts and Spas, Inc. The two men took the firm public through a reverse merger. Shortly after that Mr. Fried, acting as the CEO and President of the firm at the behest of Defendant Madsen, announced the acquisition of a resort. The press releases failed to disclose the financial terms. The firm did not have the ability to close the deal either in cash or stock. The scheme was halted when the Commission suspended trading in the stock. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23973 (Oct. 30, 2017).
Procedures-pricing: In the Matter of UBS Financial Services Inc., Adm. Proc. File No. 3-18270 (Oct. 27, 2017). Respondent UBS is a subsidiary of UBS AG, a registered investment adviser and broker-dealer. Over a five year period beginning in January 2010 UBS did not have adequate systems and controls to determine if a customer was eligible to purchase a class of mutual fund shares on which the fees were waived. As a result the firm failed to provide 113,543 customers involved in about 15, 250 transactions with fee waived shares. Those customers could have purchased fee waived shares but were not furnished the opportunity by UBS. Instead the firm recommended, and customers purchased, shares that had a sales charge. In these transactions UBS also failed to advise clients about the fees it would earn if they purchased shares that had a sales charge. The information about the cost structure of the different shares would have been important to a reasonable investor, according to the Order. Those customers paid $18,529,533 in additional charges, fees and expenses from purchasing mutual fund shares without being informed of the options regarding the various classes of shares and the related costs. The firm has issued credits to all eligible customers. The firm has also undertaken to make reasonable additional efforts to locate and/or contact eligible customers who either have not yet cashed or deposited their payments or who otherwise have not received the payment. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceedings, UBS consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. The firm will also pay a penalty of $3.5 million.
Manipulation: In the Matter of Artemus Mayor, Adm. Proc. File No. 3-18268 (Oct. 26, 2017) is a proceeding which names as a Respondent the President, Secretary and Director of SK3 Group, Inc. The Order alleges a $2.3 million scheme to manipulate the stock of SK3. The fraud occurred in two stages. First, Respondent and Henry Lin-Ham Jan arranged a pump-and-dump scheme using false press releases and announcing what were claimed to be significant business deals to create the appearance of activity. Second, once the share price was inflated millions of unregistered shares were issued. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Respondent is also barred from serving as an officer or director for five years and from participating in any penny stock offering. In addition, Respondent will pay a penalty of $160,000.
Offering fraud: U.S. v. Zaslavskiy, No. 17-MJ-934 (E.D.N.Y. Nov. 1, 2017) charges Maksim Zaslavskiy with one count of conspiracy to commit securities fraud based on illegal, unregistered securities offerings and fraudulent conduct. Specifically, the Defendant sold shares to investors in two firms supposedly based on virtual currency. The offerings here were supposedly Initial Coin Offerings or ICOs. To secure the investments one firm was supposedly backed by real estate while the other was backed by diamonds. Investors were promised high rates of returns. Investors were also told that a team of lawyers, professionals, brokers and accountants would invest the proceeds from the offerings into the real estate. In fact the claims were false. See also SEC v. Recoin Group Foundation LLC (S.D.N.Y. Sept. 29, 2017).
Offering fraud: U.S. v. Meli, (S.D.N.Y. Oct. 31, 2017). Defendant Joseph Meli pleaded guilty to one count of securities fraud in connection with a securities offering fraud. Specifically, over a two year period beginning in 2015 Mr. Meli raised about $95 million from 130 investors who were induced to purchase shares in what they believed was a firm that had contracts and arrangements to obtain tickets to Broadway shows that could be resold at a profit. Mr. Meli furnished potential investors with fraudulent documents relating to the claimed investment. In fact much of the money was misappropriated by Mr. Meli. In connection with the plea the Defendant agreed to repay forfeit the funds and make restitution. Sentencing is set for January 31, 2018. See also SEC v. Meli, Civil Action No. 1:17-cv-00632 (S.D.N.Y. Filed Jan. 27, 2017).
Insider trading: U.S. v. Yan (S.D.N.Y. Oct. 30, 2017) is an action which names as a defendant Fei Yan. His wife was employed at an international law firm. During the summer and fall of 2016 she worked on a deal in which a Mining Company would acquire Stillwater Mining Company. The deal was announced publically on December 9, 2016. The couple had a history of exchanging confidential information. Over the time Wife worked on the transaction Mr. Yan researched takeover deals and also insider trading. Repeatedly during the period he talked to his wife, conducted research and then purchased options. On the date the deal was announced he sold his options, reaping profits of $109,420. He pleaded guilty to one count of securities fraud and agreed to forfeit the trading profits. Sentencing is set for March 2, 2018. See also SEC v. Yan, Civil Action No. 1:17-cv-05257 (S.D.N.Y. Filed July 12, 2017).
Offering fraud: U.S. v. Seitz, No. 1:16-cr-98 (E.D. Va.). Defendant Gregg Seitz was sentenced to serve three years in prison for running an investment fraud involving $2.3 million of investor funds. Essentially investors were told that they could invest in a business in which homes would be purchased, renovated and flipped and that the firm had a government contract. In fact there were no homes and no government contract. The Defendant was also ordered to forfeit $2.3 million and pay $2.3 million in restitution to his victims.
AML: In the Matter of: Lone Star National Bank, No. 2017-04 (Oct. 27, 2017) is an action in which the Texas based bank was charged with violations of the Bank Secrecy Act in connection with failing to comply with it anti-money laundering obligations. Specifically, the regulator alleged that the bank permitted a Mexican bank to move “hundreds of millions of U.S. dollars in suspicious bulk cash shipments through the U.S. currency . . .” The actions began just before the Mexican government imposed regulations restricting Mexican bank transactions in U.S. Currency. The transactions increased after the Mexican government regulations went into effect. Lone Star had inadequate compliance systems and inexperienced compliance personnel. The bank was fined $2 million. Payment of a prior fine of $1 million by Lone Star to the Office of the Comptroller of the Currency will be credited against the FinCEN penalty.