This Week In Securities Litigation (Week ending November 21, 2014)
The Commission filed another settled FCPA action this week. The proceeding named two U.S. citizens living abroad as Respondents. The DOJ issued an Opinion discussing successor liability.
The DC Circuit agreed to rehear the suit which challenged the SEC’s conflict minerals rules issued under Dodd-Frank. The Court will consider the only issue in which it had ruled against the SEC. That question focused on a First Amendment issue regarding a portion of the rule which required the publication of certain information. The issue will be reconsidered in view of another recent ruling by the Circuit Court.
Finally, SEC enforcement brought actions centered on: a misappropriation claim; three cases involving stock manipulation claims; and an based on an action offering fraud.
Trading suspension: The Commission suspended trading in Bravo Enterprises Ltd., Immunotech Laboratories Inc., and Myriad Interactive Media Inc., each of which touted operations related to the prevention or treatment of ebola (here).
Rules: The SEC Adopted Rules to Improve Systems Compliance and Integrity designed to strengthen the technology infrastructure of the markets (here).
Staff accounting bulletin: The SEC Staff Released an Accounting Bulletin to Update Guidance on Pushdown Accounting (here).
Remarks: Commissioner Kara M. Stein delivered remarks at the 15th Annual “Live from the SEC” Conference, Washington, D.C. ( November 13, 2014). Her remarks focused on capital formation (here).
Remarks: Andrew Ceresney, Director, Division of Enforcement, addressed the 31st International Conference on the Foreign Corrupt Practices Act, National Harbor, Maryland (November 19, 2014). His remarks focused on prosecutions against individuals, the importance of compliance, cooperation and the statutory concept of “anything of value” under the Act (here).
Remarks: Norm Champ, Director of Investment Management, addressed the ALI 2014 Conference on Life Insurance Company Products, Washington, D.C. (November 13, 2014). His remarks included comments on the on-going disclosure review, alternative mutual funds, the risk and examinations office and disclosure for mutual funds (here).
Remarks: Chairman Timothy G. Massad addressed the CME Global Financial Leadership Conference (November 14, 2014). In his remarks the Chairman discussed the importance of U.S. leadership in regulatory reform, his basic core principles, the cross boarder challenge and cybersecurity (here).
Remarks: Commissioner J. Christopher Giancario addressed the U.S. Chamber of Commerce with remarks titled Re-Balancing Reform: Principles for U.S. Financial Market Regulation in Service to the American Economy (November 20, 2014). His remarks focused on six key principles for financial market reform (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the SEC filed 5 civil injunctive action and 1 administrative proceedings, excluding 12j and tag-along-actions.
Market access: In the Matter of Wedbush Securities Inc., Adm. Proc. File No. 3-15913 (November 20, 2014) is a settlement in a previously filed action which named as Respondents the broker dealer, Jeffrey Bell, the firm’s EVP for the Correspondent Services Division, and Christina Fillhart, a senior V.P. in the same division. The initial proceeding alleged violations of the market access rule as detailed here. Each Respondent resolved the claims. The firm admitted to violating the federal securities laws and to the facts set forth in a nine page addendum attached to the Order which essentially outline the action. It will also implement certain undertakings. The individuals resolved the claims without admitting or denying the allegations alleged in the Order except as to the jurisdiction of the Commission. Wedbush consented to the entry of a cease and desist order based on Exchange Act Sections 15(c)(3) and 17(a) and to a censure. In addition, the firm agreed to pay a penalty of $2,447,043.38. Mr. Bell consented to the entry of a cease and desist order based on the same Sections. He also agreed to pay disgorgement of $25,000, prejudgment interest and a penalty of $25,000. Ms. Fillhart consented to the entry of a cease and desist order based on the same Sections. She also agreed to pay disgorgement of $25,000 along with prejudgment interest. A civil penalty was not imposed based on financial condition.
Misappropriation: SEC v. Scipione, Civil Action No. 8:14cv2886 (M.D. Fla. Filed November 18, 2014) is an action which names as a defendant Albert Scipione, previously a registered representative, and the managing member of Traders, Café, LLC. Beginning in December 2012, and continuing until October 2013, Mr. Scipione and his business partner, Matthew Ionne, solicited investors to establish accounts at Traders Café. The purpose was to day trade in the hopes of making profits. Investors were assured that their funds would be held in segregated accounts and used only for day trading or other related specific business purposes. Investors deposited about $367,000 with Traders Café. In addition, one investor put $150,000 directly into the business. From the beginning, customers encountered problems and many cancelled their accounts. Mr. Scipione and his partner diverted much of the investor money to their personal use. Eventually less than $1,200 remained. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. Previously, Mr. Ionno settled charges with the Commission. The U.S. Attorney’s Office filed parallel criminal charges against both men. Mr. Scipione has pleaded guilty. See Lit. Rel. No. 23136 (November 19, 2014).
Manipulation: SEC v. Forum National Investments Ltd., Civil Action No. 5:14-cv-02376 (C.D. Cal. Filed November 18, 2014) is a case which names as defendants the company, Daniel Clozza, its CEO, and three penny stock promoters, Robert Dunn, William Anguka and Ahmad Ghaznawi. Forum National initially sold memberships in a travel club and chartered its yacht and later was engaged in the life settlement business. By September 2011 Forum was experiencing significant financial difficulties. In November Mr. Clozza sought introductions to internet promotional companies through which he met the other defendants who were retained to assist in promoting the company. Subsequently, Messrs. Anguka and Ghaznawi disseminated web pages and internet news letters touting Forum’s business prospects. Despite the fact that there was no basis for the claims, the stock price, quoted in the pink sheets, climbed rapidly from about $0.35 in May 2012 to over $2.00 per share in June 2012. Mr. Dunn, along with relatives and associates of Mr. Clozza, sold more than one million shares of Forum stock, profiting from the inflated, artificial price. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 13(a) and Securities Act Section 17(b). The Commission also initiated an administrative proceeding against Forum under Exchange Act Section 12(j). The actions are pending. See Lit. Rel. No. 23135 (November 19, 2014).
Manipulation: SEC v. Noel, Civil Action No. 3:14-CV-5054 (N.D. Cal. Filed November 17, 2014) names as a defendant Joseph Noel, the CEO of YesDTC Holdings, Inc., a firm he created through a reverse merger in 2009. In February 2009 Mr. Noel formed Sonoma Winton, LLC and appointed his daughter as the sole member, although he continued to control the entity. During 2011 Mr. Noel is alleged to have conducted two pump-and-dump schemes. In each of the schemes Mr. Noel prepared and had issued false and misleading press releases touting the business of the firm which supposedly specialized in direct-to-consumer marketing. In each instance the share price spiked upward significantly. In each instance Mr. Noel secretly sold shares through Sonoma. Overall he netted about $300,000 in profits from the two schemes. The complaint alleges violations of Exchange Act Sections 10(b) and 16(a), and Securities Act Sections 5(a), 5(c) and 17(a). The action is pending. See Lit. Rel. No. 23134 (November 17, 2014).
Manipulation: SEC v. Thompson, Civil Action No. 14 CV 9126 (S.D.N.Y. Filed November 17, 2014) is an action which names as defendants: Anthony Thompson, a penny stock promoter who controlled OTC Solutions LLC; Jay Fung, a penny stock promoter who controlled Pudong, LLC; Eric Van Nguyen, a penny stock promoter who controlled Golden Dragon Media, Inc.; John Babikian who operated a penny stock promotion business primarily through the web site AwesomePennyStocks.com; and Kendall Thompson, the wife of Anthony Thompson. This action centers on five pump-and-dump schemes involving the shares of Blast Applications Inc., Smart Holdings, Inc., Blue Gem Enterprise, Inc., Lyric Jeans, Inc., and Mass Hysteria Entertainment Company, Inc. In each scheme the defendants acquired a significant amount of the stock in the firm and in some instances a majority. Misleading newsletters were then sent to prospective investors. After the share price was inflated the defendants sold their shares. Subsequently, the share price dropped, leaving investors with losses. The manipulations took place between November 2009 and September 2010. The defendants had profits of at least $10 million. The complaint alleges violations of Securities Act Sections 17(a) and 17(b) and Exchange Act Section 10(b). The case is in litigation.
Offering fraud: SEC v. Azar, Civil Action No. 14-cv-3598 (D. Md. Filed November 14, 2014). Wilfred Azar has been the majority owner of Empire Corporation, both defendants, since 1999. Joseph Giordano, also a defendant, was the branch manager and a registered representative associated with a registered broker-dealer. In addition, he is the sole owner, General Manager and President of Giordano Asset Management, a one-time registered investment adviser which served as the adviser to the Giordano fund.
Mr. Azar became President and CEO of Empire when he acquired the company from his grandfather, its founder. The company owned and operated a 250,000 square foot, ten-story office building in Glen Burnie, Maryland. Rental income from the building was the primary source of revenue for the company. For several years prior to acquiring the company, Mr. Azar sold bonds as secondary financing for its operations. He continued this practice after acquiring Empire. Shortly after acquiring Empire Mr. Azar arranged for the broker where his long time friend and business associate, Joseph Giordano was employed, to custody the bonds so that holders could place them in an IRA account. While Mr. Giordano’s firm cautioned him to only sell the bonds on an unsolicited basis and prohibited him from recommending them, he ignored the restrictions. At the same time, Mr. Azar arranged for Broker A, associated with another registered broker-dealer, to sell the bonds. Collectively, Messrs. Azar, Giordano and Broker A raised over $7 million from about 50 investors. Investors were assured that Empire as a successful, profitable business. They were also told that their funds would be used to further develop the business. In fact the financial condition of the firm was deteriorating as it debt increased due in part to the diversion of funds by Mr. Azar to support his other unprofitable businesses and life style. By 2010 the Defendants were unable to recruit new investors. Empire was no longer able to repay existing investors. Most of the investors lost substantially all of their investment. The SEC’s complaint alleges violations of Securities Act Sections 5(a) , 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 34(b). The action is pending. A parallel criminal action was filed against Mr. Azar by the U.S. Attorney’s Office for the District of Maryland. See Lit. Rel. No. 23232 (November 14, 2014).
In the Matter of Stephen Timms, Adm. Proc. File No. 3-16281 (November 17, 2014) is a proceeding which names as Respondents Stephen Timms and Yasser Ramahi, both U.S. citizens residing abroad, who were employed by FLIR Systems, Inc. The firm, founded in 1978, makes thermal imaging and other sensing products and systems, night vision and infrared camera systems. Mr. Timms was, at the time of the events at issue here, the head of FLIR’s Middle East office in Dubai. Mr. Ramahi worked in business development in the same office. He was one of the executives responsible for obtaining business in the firm’s Government Systems division for the Arabia Ministry of Interior.
In November 2008 FLIR entered into a contract with the Arabia Ministry to sell thermal binoculars. The agreement was worth about $12.9 million. The factory acceptance test was a key condition to the fulfillment of the contract. The firm expected that a successful contract would lead to others. In May 2009 FLIR signed another agreement. This contract called for the integration of its cameras into the product of another firm, again for the Arabia Ministry. The contract was valued at $17.4 million. Messrs. Ramahi and Timmins were involved with the negotiations for both contracts.
In February 2009 Messrs. Ramahi and Timms began preparing for the factory acceptance test, scheduled for July 2009 in Billerica, Massachusetts. The next month Mr. Timms, in the presence of Mr. Ramahi, provided five Ministry officials with watches as gifts. Each watch cost about $1,424, according Mr. Timms. The invoices were submitted to the company for payment. Subsequently, arrangements were made for the Ministry officials to go on what Mr. Timms later called a “world tour” in connection with the test – travel that extended over twenty nights in luxury hotels. The factory tour took place in Boston in one afternoon. The company paid all expenses. When the finance department flagged the expenses for the watches and later the travel it was furnished with false information and invoices. Following the inspection, the Ministry told FLIR to ship the thermal binoculars. Later the Ministry ordered additional binoculars.
The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(5). Each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Timms agreed to pay a civil money penalty of $50,000. Mr. Ramahi will pay a penalty of $20,000.
Opinion: The DOJ issued Opinion Procedure Release No. 14-02 (November 7, 2014). It addressed the question of successor liability. It is a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company, according to the opinion. Thus where a purchaser acquires the stock of a seller and integrates the firm into its operations, successor liability may be conferred upon the purchaser, including for FCPA violations. At the same time, liability cannot be conferred where there is none. In this case, where the firm to be acquired paid bribes but none of the acts were subject to the jurisdiction of the United States, the acquisition does not confer liability on the acquiring firm. The Department declined prosecution based on the facts presented.
Insider trading: U.S. v. Braverman (S.D.N.Y.) is an action which names as a defendant Dmitry Braverman, formerly employed as a senior systems engineer at a prominent national law firm. Between 2010 and 2011 Mr. Braverman engaged in at least four trades based on inside information regarding potential mergers that he obtained from the law firm where he was employed. He closed out the last of those trades on the day another firm employee, Matthew Kluger, was arrested on separate insider trading charges. Subsequently, he opened a new brokerage account and placed four more trades using firm information. Overall he made about $300,000 in illicit trading profits. This week he pleaded guilty to a one count information alleging securities fraud.
Court of Appeals
Conflict mineral rules: National Association of Manufactures v. SEC, No. 1:13-5252 (Order dated November 18, 2014) is an action which initially challenged the conflict mineral rules written under Dodd-Frank by the Commission. The initial ruling by the Court upheld, in large part, the rules. The Court struck down, however, one provision on First Amendment grounds regarding the publication of certain information (here). The Court has now agreed to rehear that issue based on its en banc ruling in American Meat Institute v. U.S. Department of Agriculture, 760 F. 3d 18 (D.C. Cir. 2014).
Unlicensed FX business: The Australian Securities Investment Commission initiated proceedings against Vault Market Pty Ltd and its sole director Anamul Amin. The Commission alleged that the firm was an unlicensed FX business, conducted through a website. Over 800 investors had invested almost $1.1 million. The court found that the firm acted without a license and engaged in misleading and deceptive conduct and that Mr. Amin had contravened the law. Both defendants admitted to their conduct during the proceeding. Mr. Amin was banned from the financial services industry for eight years and from managing a corporation for five years.
Related party loans: The ASIC initiated proceedings against LM Investment Management Ltd founder Peter Drake based on a series of loans authorized between the fund and another entity Mr. Drake owned and controlled in 2011 and 2012. The loans were supposed to be for a certain real estate development. At the time the fund entered into administration no development had taken place.
Unregistered broker: The ASIC entered an order against Scott Logan for providing financial services between April 2011 and June 2013 without being registered. Specifically, during the period, through Shore Capital he traded in contracts for difference on behalf of retail clients when not authorized and without holding an Australian financial services license. Later he traded on behalf of retail clients when he held a license only for wholesale clients.
Investment fund fraud: The Serious Frauds Office announced that a former director of investment firm Imperial Consolidated Group, William Godley, was ordered to pay £1.5 million which will be used to compensate victims of the fraud within six months and a three year prison term in default of payment. In 2010 Mr. Godley was convicted of conspiracy to defraud in an international scheme that raised over £250 million from about 3,000 investors who were told their funds would be used to finance a commercial loan business. Instead the money was misappropriated.