This Week In Securities Litigation (Week ending October 20, 2017)
The Supreme Court removed Leidos from its argument document this week. The case, which focused on a question regarding the scope of Section 10(b) in a securities class action, was scheduled for argument next month.
The Commission filed a financial fraud action against mining giant Rio Tinto and its former CEO and CFO. The action centered on the acquisition of a mining property for over $3 billion which rapidly devalued but was not written down by the firm. In addition, the agency brought actions based on an offering fraud for a private company using a false PPM, an investment adviser who misappropriated funds from a charity and another financial fraud case centered on a one time blank check company.
Scope of Section 10(b): Leidos, Inc. v. Indiana Public Retirement System, No. 15-581. The court removed the case from the argument calendar based on a tentative settlement. The issue in the case centered on whether Item 303 of Regulation S-K regarding certain forward looking trends required to be disclosed in the MD&A section of Commission filings governed the disclosure obligations of an issuer in a securities class action based on Exchange Act Section 10(b).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 4 civil injunctive case and 2 administrative proceedings, excluding 12j and tag-along proceedings.
Misappropriation: SEC v. Rogicki, Civil Action No. 17-civ-08071 (S.D.N.Y. Filed Oct. 19, 2017). Defendant John Rogicki was employed as an investment adviser representative at Train, Babcock Advisors, LLC. Through that positon he befriended an elderly woman and served as executor of her estate. He also served as trustee of a Foundation dedicated to improving education and healthcare. Between 2004 and 2016 defendant misappropriated about $9 million from the Foundation, generally by liquidating securities potions in its advisory account, wiring the funds to an account of the elderly woman and then moving the funds to his account. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2) and Exchange Act Section 10(b). The case is pending. The Manhattan district attorney filed a parallel criminal action. See Lit. Rel. No. 23970 (Oct. 19, 2017).
Records: In the Matter of Loop Capital Markets, LLC, Adm. Proc. File No. 3-18257 (Oct. 19, 2017) is a proceeding which names the broker-dealer as a Respondent. During 2011 and 2012 a registered representative at the firm used her personal email to conduct Loop Capital business regarding a financial transaction. The firm’s policies prohibited the use of personal email accounts. The representative deliberately used her personal account to avoid surveillance. When the staff requested that the broker-dealer produce the pertinent records, Respondent was unable to do so since they were from the personal email account. The Order alleges violations of Exchange Act Section 17(a) and rule 17a-4(b)(4) thereunder. To resolve the matter the firm consented to the entry of a cease and desist order based on the Section and rule cited in the Order. In addition, the firm will pay a penalty of $25,000.
Financial fraud: SEC v. Rio Tinto Plc, Civil Action No. 1:17-cv-07994 (S.D.N.Y. Filed Oct. 17, 2017). Named as defendants are the firm, its subsidiary Rio Tinto Limited, and two of its executives, former CEO Thomas Albanese and former CFO Guy Elliott. In July 2007 Rio Tinto acquired Alcan, Inc., an aluminum processing company, for $38 billion. By February 2009 the firm announced a $7.9 billion impairment charge to Alcan’s carrying value. Additional impairment charges were announced later. Eventually virtually all of the value of the acquisition, made under the watch of CEO Albanese and CFO Elliott, was written off. Subsequently, the firm acquired a coal property for about $3.7 billion. Although the firm’s analysis uncovered substantial risks, the CEO and CFO, in their zeal to find a successful deal, did not inform the board when it approved the deal. Difficulties developed almost immediately. The Government of Mozambique notified the firm that it would not permit barging on the Zambezi River to transport the coal from the mine because of environmental concerns. While the coal could still be moved by rail, capacity was limited. Rio Tinto could only move a small fraction of the coal originally planned. At year end 2011 and in early 2012 the firm created valuations for the acquisition that ranged from negative $3.45 to negative $9 billion – all based on aggressive assumptions. Despite the transportation difficulties and negative valuations Mr. Albanese downplayed the Government’s actions. Despite the difficulties and internal analysis showing the declining value of the property, the value of the mine was not written down. Eventually a firm employee informed the chairman of the board about the impairment valuations calculated by the firm. An investigation followed, the CEO resigned and a $3 billion impairment charge tied to the coal company was taken. 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.
Offering fraud: In the Matter of Mergenet Medical Inc., Adm. Proc. File No. 3-18253 (October 16, 2017). Respondent Mergenet is a Florida based firm engaged in the development of medical devices for pulmonary and respiratory conditions. Also named as Respondents are: Bruce Sher, the firm’s co-founder, co-president and a director; Shara Hernandez, a co-founder and co-president of the firm; and Peter DeCicco Jr., an employee in the firm’s public relations department. Over a three year period beginning in 2012 the firm raised about $1.4 million from 72 accredited investors. The sales were marketed using private placement memoranda, written company presentations, videos, and oral communications. The PPM and other written materials were mailed to prospective investors. During the relevant period Respondents made misstatements or omissions to investors in those materials. The Order alleges violations of Securities Act Sections 17(a)(2). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, Respondents Sher and Hernandez will each pay a penalty of $60,000 while Respondent DeCicco will pay $50,000.
Financial fraud: SEC v. Accelera Innovations, Inc., Civil Action No. 1:17-cv-7052 (N.D. Ill. Filed Sept. 29, 2017) is an action against the firm, originally a blank check company which now claims to be a health services firm, Synergistic Holdings, LLC, a privately held firm, and Geoffrey Thompson, the founder and chairman of Accelera and a control person of Synergistic. The complaint alleges that over a two year period beginning in 2013 Accelera falsely inflated its revenues by including those of Synergistic based on a claim it had acquired the firm. It did not. The firm also claimed to have proprietary software. It did not. And defendants sold unregistered securities through Accelera and Synergistic to investors. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Sections 10(b) and 13(a). The action is pending. See Lit. Rel. No. 23969 (Oct. 19, 2017); See also SEC v. Wallin, Civil Action No. 1:17-c—0757 (N.D. Ill. Filed Sept. 29, 2017)(action against John Wallin, former CFO of Accelera, for executing false certifications re Accelera’s Forms 10-K and 10-Q in violation of Exchange Act Rule 13a-14 and aiding and abetting violations of Exchange Act Section 13(a); settled with the entry of a permanent injunction based on the Section and rule cited in the complaint and an officer and director bar; penalties will be considered at a later date).
Market manipulation: U.S. v. Shapiro, No. 14-cr-399 (E.D.N.Y.). Named as defendants are Ira Shapiro and Darren Ofsink. Mr. Shapiro is the CEO of CodeSmart Holdings, Inc. Mr. Ofsink is a Manhattan based attorney. Each defendant pleaded guilty to one count of conspiracy to commit securities fraud. The charges stem from the participation by each defendant in an $86 million market manipulation scheme centered on the shares of CodeSmart. In May 2013, according to the charging documents, the defendants and others took CodeSmart, then a privately held firm, public through a reverse merger with a public shell company. The defendants and their confederates then obtained control of the free trading shares of the new public firm. Subsequently, the defendants assisted in pushing the share price up to artificial levels in two instanced during 2013. At its highest point the firm had a market capitalization of over $86 million. Yet the same day the firm filed a Form 10-K with the SEC reporting total assets of $6,000, revenue of $7,600 and a net loss of $103,141. By the end of December 2013 the share price of CodeSmart stock was $0.66. By the middle of the next year it was $0.01. The date for sentencing has not been set