This Week In Securities Litigation (Week ending September 22, 2017)
The Commission became a cybersecurity headline this week, not for brining a case or writing a rule in the area but for an intrusion into its systems. The Chairman issued a statement on the subject.
The Commission resolved an FCPA case, along with the DOJ and Public Prosecution Service of the Netherlands this week. It involved a Swedish based telecommunications firm entering the telecommunications market in Uzbekistan. The company agreed to pay a total of over $965,000,000 in criminal and regulatory penalties to resolve the matter. In addition, the Commission filed two settled insider trading cases and one offering fraud action.
Cybersecurity: Chairman Clayton issued a statement discussing cybersecurity at the Commission (here).
Guidance: The Commission adopted interpretative guidance on the pay ratio rule (here).
OCIE: The Office of Compliance, Inspections and Examinations published “The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers” (Sept. 14, 2017)(here).
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC did not file any civil injunctive cases but did file 4 administrative proceedings, excluding 12j and tag-along proceedings.
Expenses: In the Matter of Platinum Equity Advisors, LLC, Adm. Proc. File No. 3-181194 (Sept. 21, 2017) is an action against the registered investment adviser. The firm managed three separate funds from 2004 through 2015. During that period the three funds, along with affiliates of Platinum that included the Funds’ general partner, and or members, officers, directors and employees of Platinum (collectively “affiliates”) co-invested pre-determined amount in each consummated portfolio company investment through separate co-investment vehicles. The LPAs and other papers stipulated that the Funds would pay their operating expenses. Broken deal expenses were charged to the Funds. The LPAs did not state that broken deal expenses would be paid for the affiliates. As a result Platinum violated Advisers Act Section 206(2) and 206(4). To resolve the matter, Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Respondent will pay disgorgement of $1,902,132 to compensate the Funds from the second quarter of 2012 through 2015. This amount includes disgorgement and prejudgment interest. The disgorgement amount of $1,708,388 represents $1,811,301 in broken deal expenses allocated to the Funds less $103,113 which represents the portion of those expenses owed to Platinum affiliated limited partners of the Funds.
Insider trading: In the Matter of Joel P. Zingerman, Adm. Proc. File No. 3-18196 (Sept. 21, 2017) is an action which names Mr. Zingerman, a consultant to the pharmaceutical industry, as a Repondent. In April 2012 Mr. Zingerman became a consultant to Puma Biotechnology, Inc. Through his work he learned about Phase III clinical trials involving a drug and the firm’s plans to obtain registration for it with the FDA. The morning of June 22, 2014, when the firm was scheduled to announce these facts, Respondent purchased 325 shares of Puma. Following the announcement the share price nearly quadrupled, yielding a profit for Mr. Zingerman of $56,605. The Order alleges a violation of Exchange Act Section 10(b). To resolve the case Mr. Zingerman consented to the entry of a cease and desist order based on the Section cited in the Order. In addition, he agreed to pay disgorgement in the amount of his profits, prejudgment interest and a penalty equal to the amount of the disgorgement.
Insider trading: SEC v. Chang, Civil Action No. 5:17-cv-05438 (N.D. Cal. Filed Sept. 20, 2017). Defendant Peter Chang is the founder and CEO of Alliance Fiber Optic Products, Inc. which designed and manufactured high performance fiber optic components and integrated modules. Founded in 1995, the company went public in 2000. During his tenure at the firm Mr. Chang had two nominee brokerage accounts – he controlled them but one was in his wife’s name and the other that of his brother. He used the accounts to trade in firm securities. In early 2015 the firm began merger talks with Corning Inc. The discussions went-on for several months. During the period Defendant Chang sold company shares in advance of the earnings announcements for the third quarter of 2015 and the fourth quarter of that year, avoiding losses. He acquired shares in advance of the announcement of the tender offer by Corning for the firm on April 7, 2016. During the same period Mr. Chang’s brother also traded in company shares, largely mimicking the trades in the nominee accounts. In total Defendant Chang had trading profits of over $1.5 million while his brother had over $600,000. The complaint alleges violations of Exchange Act Sections 10(b), 14(e) and 16(a). The case is pending. The U.S. Attorney’s Office for the Northern District of California filed a parallel criminal case. See Lit. Rel. No. 23937 (Sept. 20, 2017).
Offering fraud: SEC v. Illarramendi, Civil Action No. 3:11-cv-78 (D. Conn.) is a previously filed action centered on an offering fraud. Francisco Illarramendi, the operator, previously pleaded guilty in a parallel criminal action and is serving 13 years in prison. This week the court entered judgments against two of the involved entities, Highview Point Partners LLC and Michael Kenwood Capital Management, LLC, permanently enjoining each from future violations of Advisers Act Sections 206(1), 206(2) and 206(4) and, in addition, Highview Point from future violations of Exchange Act Section 10(b). No disgorgement was ordered because a court-appointed receiver has distributed over $330 million to defrauded investors and creditors paying them back 92% or 100% of their verified losses. See Lit. Rel. No. 23936 (Sept. 19, 2017).
Offering fraud: U.S. v. Hudspeth, No. 2:17-cr-122 (E.D. Va.). Roger Hudspeth and his firm, Dominion Investment Advisors, LLC, were Virginia state registered investment advisers. Mr. Hudspeth and his firm held what the called social security maximization seminars, seeking clients who were approaching retirement. Those who attended were directed to purchase securities that were part of offerings created by Mr. Hudspeth’s associate. The associate had been banned from the securities business by FINRA for fraudulent dealings. Rather than being safe, conservative investments, the securities from the offerings were unregistered, illiquid and at best highly speculative. Nevertheless, Mr. Hudspeth used a series of misrepresentations to convince potential investors that the investments had merit. Over $6 million was raised from investors. Mr. Hudspeth received about $700,000 for his efforts. Early in 2016 the Virginia State Corporation Commission entered a judgment order against Mr. Hudspeth, revoking his licenses. His firm was permanently closed. Mr. Hudspeth was prohibited from engaging in any investment advisory activities in the future. Mr. Hudspeth pleaded guilty to one count of investment adviser fraud and one count of conducting unlawful monetary transactions. Sentencing is scheduled for January 22, 2018.
Offering fraud: U.S. v. Jaramillo, No. 1:17-cr-0004 (S.D.N.Y.). Pedro Jaramillo is a Peruvian national residing in Manhattan. Over a two year period beginning in early 2014 he raised about $1.2 million from over two dozen investors for trading in commodities. To attract investors Mr. Jaramillo obtained an office on Wall Street; he created a youtube.com video on which he featured his sales pitch. The background music was Frank Sinatra singing New York New York. A prominent Global Investment bank was used as a reference. In meetings with clients at the Wall Street office Mr. Jaramillo promised potential investors that he would be a “trusted partner” who would establish an individual account for each person. He was not; much of the money was misappropriated. Mr. Jaramillo pleaded guilty to charges of commodity fraud and wire fraud. The court sentenced him to serve twelve years in prison followed by three years of supervised release. In addition, the court ordered him to forfeit the proceeds of the scheme and to pay restitution in an amount to be determined.
Anti-corruption – FCPA
Telia Company AB, a multinational telecommunications firm based in Sweden, and its majority-owned subsidiary, Coscom LLC, settled anti-corruption charges with the DOJ and the Prosecution Service of the Netherlands or PPS, and the parent settled FCPA charges with the SEC. In total the firm agreed to pay $965,773,946. U.S. v. Telia Co., No. 1:17-cr-60581 (S.D.N.Y. Filed Sept. 20, 2017); In the Matter of Telia Company AB, Adm. Proc. File No. 3-18195 (Sept. 21, 2017).
Telia, whose shares were traded on NASDAQ prior to 2005 was a U.S. issuer until September 5, 2007 when its application to deregister its shares became effective. In 2006 the firm sought to expand into the Eurasia telecommunications market, including Uzbekistan. At the time Coscom was a Uzbek telecommunications operator owned by a U.S. firm. Telia acquired the firm in 2007.
The telecommunications industry in Uzbekistan was highly regulated. The Communications and Information Agency of Uzbekistan or ACI controlled the industry. Private parties could not purchase licenses, frequencies, channels or number blocks in the country. Official A was a government official in the country who exerted significant influence and could cause public officials to take actions that would benefit the company.
Senior managers at Telia understood that they needed to negotiate with Official A to acquire Coscom within the Uzbek market. By the end of 2007 Telia and Official A executed a series of agreements which, in effect permitted the company to acquire a controlling interest in Coscom and gave Official A minority stake for $50 million. The Official also received a put option to sell the interest back in 2010 for $85 million. In connection with the transaction the Official arranged for COSCO to acquire 3G licenses, 50 1800 MHz frequencies, an internet services license and number blocks, although under the law these transactions should not have occurred. The next year Telia acquired additional numbers to expand it network.
In 2010 the Official caused the partial exercise of the put option. Telia paid the Official $220 million for his interest. In the same year the firm paid the Official $55 million in connection with the acquisition of 4G licenses and the acquisition of a fiber-optic lease. In each instance the transactions were run through Official A’s firm which supposedly supplied services. These were essentially sham transactions. Overall Telia obtained revenues of over $2.5 billion in return for the bribes paid while paying Official A at least $330 million in bribes.
To resolve the matter with the DOJ, Telia entered into a deferred prosecution agreement, agreeing to pay a criminal penalty of $274,603,972. This included a $500,000 criminal fine and $40 million in criminal forfeiture the firm paid on behalf of Coscom which pleaded guilty to one count of conspiring to violate the anti-bribery provisions of the FCPA. The firm also agreed to pay PPS $274 million.
To settle with the SEC Telia consented to the entry of a cease and desist order based on Sections 30A and 13(b)(2)(B) of the Exchange Act. The firm also agreed to pay disgorgement of $457,000,000. The $40,000,000 paid to the DOJ as forfeiture will be credited against that amount.
Continuous disclosure: Sirtex Medical Limited paid a penalty of $100,000 for failing to comply with its continuous disclosure obligations. Specifically, on December 9, 2016 the firm announced that it projected dose sales to grow by 4-6% for the first half of the year and 5-11% in the second. Previously, the firm announced it expected dose sales to be in the double digits for 2017. The Australian Securities and Investment Commission concluded that the firm should have known about the correction in the projection no later than November 21, 2016.
Manipulation: The ASIC charged Benjamin Amzalak, a former member of Precious Metal Resources Ltd.’s key management personnel, with manipulation of its shares in ten instances. The proceedings were adjourned until November 14, 2017.
Unregistered broker: The Securities and Futures Commission obtained a criminal conviction against ETradeHK and fined the firm $20,000 for aiding and abetting ETradeUS which held itself out as a licensed broker in Hong Kong when it was not. This is the first criminal conviction obtained by the regulator for such an offense.
Remarks: Mark Steward, Director of Enforcement and Market Oversight delivered remarks to the AFME European Compliance and Legal Conference, London, England (Sept. 20, 2017). In his remarks the Directed noted that there would be more investigations into capital market disclosure issues and that the agency had changed its approach to deciding when to open an investigation (here).
Seminar: Annual Private Funds Symposium, September 27, 2017, New York City, here
Webcast: Securities Issues & the Supreme Court: A Look Back and Ahead, by Tom Gorman; Celesq and West Legal Ed, September 28, 2017, here