This Week In Securities Litigation (Week ending September 7, 2012)
This week the Commission filed three actions against former employees of Robert Allen Stanford’s one time empire. Two cases involved Chinese companies. One is a fraud action involved a Chinese reverse merger while the other centered on the sale of a substantial stake by a U.S. parent of its interest in a PRC based subsidiary making solar panels which was not disclosed to investors who purchased shares in the parent to help finance the operation of the subsidiary.
The Commission also brought additional insider trading cases. Two involved corporate executives while a third named as a defendant the founder of a public relations firm who traded after the firm was retained in connection with a corporate transaction.
SEC Enforcement: Filings and settlements
Statistics: This week the Commission filed 7 civil injunctive actions and 5 administrative proceedings (excluding follow on and 12j actions).
Undisclosed conflicts: In the Matter of Focus Point Solutions, Inc., Adm. Proc. File No. 3-15011 (Sept. 6, 2012) is a proceeding naming as Respondents, Focus Point, a registered investment adviser that provides advice and back office custodial support for other advisory firms; The H Group, a registered investment adviser that shares common ownership with Focus Point and offers advisory services to retail clients; and Christopher Hicks, President and owner of Focus Point and the H Group. According to the Order, Focus Point failed to disclose two key conflicts. First, it was paid undisclosed compensation as a result of a revenue sharing agreement with a broker dealer for all client investments in certain mutual funds. This violated Advisers Act Sections 206(2) and 207. Second, the firm furnished misleading information to a Trustee during the process of being hired as a sub-adviser to the fund by representing that all of its compensation would come from the sub-advisory fee. In fact it had an an arrangement with the fund’s primary adviser to obtain compensation. This violated Investment Company Act Section 15(c). Finally, The H Group voted client proxies in favor of the proposal to approve Focus Point as the fund’s sub-adviser despite its related adviser having a financial interest in the outcome. This violated Advisers Act Sections 206(2) and 206(4). The Respondents settled the proceeding. Each consented to the entry of a cease and desist order based on the applicable Sections cited in the Order as to them. In addition, Focus Point agreed to disgorge $900,000, pay a $100,000 penalty and retain an independent consultant regarding its compliance procedures. The H Group and Mr. Hicks will each pay a $50,000 penalty.
Insider trading; SEC v. Reed, Case No. 1:12-cv-07119 (N.D. Ill. Filed Sept. 6, 2012) is an action against Arthur Reed and Allan Derusha, his father-in-law. Mr. Reed was employed at APP Pharmaceuticals, Inc. as the director of Contract Marketing. On April 2, 2008 the board of APP approved the execution by management of two confidentiality agreements for discussions with potential acquirers. It also authorized management to engage financial advisors to assist with a potential acquisition. From the end of May until early June 2008 the company had negotiations with three potential acquirers. On or before May 27 Mr. Reed learned through his employment that APP was in the process of being acquired by another company. He subsequently purchased shares of APP stock valued at about $438,504. He also tipped his father-in-law who traded. After the announcement on July 7, 2008 that the company would be acquired, each defendant sold the shares. Mr. Reed had profits of $272,958 while Mr. Derusha obtained $163,281 in ill gotten gains. To settle the action each defendant consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, Mr. Reed agreed to disgorge all of his trading profits, pay prejudgment interest and a penalty of $94,182. Mr. Derusha agreed to disgorge $159,230, pay prejudgment interest and a penalty of $79,615. See also Lit. Rel. No. 22474 (Sept. 6, 2012).
Fraudulent concealment: SEC v. Worldwide Energy and Manufacturing USA, Inc., Civil Action No C 12 4651 (N.D. Cal. Filed Sept. 6, 2012) is an action against the company, Jimmy Wang, its co-founder, CEO and Chairman; Jeff Waston, a former director and CFO; and Mindy Wang, wife of Jimmy Wang and also a co-founder of the company who held various senior positions. The San Francisco based company makes solar cells through subsidiaries in China. In February 2009 defendant Jimmy Wang entered into two contracts on behalf of the company to transfer a substantial minority interest in its solar subsidiary to its three Chinese managers, effective February 2010. The other two defendants were aware of this agreement which was not disclosed to the board or its auditors. In early 2010 the company raised $9 million from U.S. investors in two private offerings of common stock and warrants. The funds were to expand the solar subsidiary. Investors were not told of the deal with the two managers of the subsidiary. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and Securities Act Sections 17(a)(1), (2) and (3). Each defendant consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint as to them. The company, in addition agreed to pay a $100,000 penalty. The individual defendants each agreed to permanent officer and director bars. Defendants Mindy Wang and Watson each agreed to pay penalties of $50,000. The terms of the settlement with Jimmy Wang reflect the fact that he entered into a cooperation agreement, rendered substantial assistance to the investigation and will assist in the ongoing investigation.
False disclosure: In the Matter of Raymond J. Lucia Companies, Inc., Adm. Proc. File No. 3-15006 (Sept. 5, 2012) is a proceeding against the company, a registered investment adviser, and its owner, Respondent Raymond J. Lucia, Sr. Respondents promoted an investment strategy at seminars, on websites and in books called “Buckets of Money.” The system called for the division of a pool of funds into three buckets, each with a different investment strategy so that a retiree could draw down some funds from one bucket while others remained invested to earn returns. Respondents represented that the strategy had been extensively backtested, meaning that it was evaluated by modeling it against historical data. In fact it was not and little actual testing had been done on the theory. Respondents were unable to produce virtually any records regarding the testing. The Order alleges violations of Advisers Act Sections 206(1) and (2) and Section 206(4) – 1(a)(5). The proceeding will be set for hearing.
Investment fraud: SEC v. Howard, Case No. 0:12-cv-61731 (S.D. Fla. Filed Sept. 5, 2012) is an action against James Howard, president for a period of Commodities On Line, LLC or COL, Michael Casey, originally outside counsel who became president of COL after Mr. Howard was sent to prison on narcotics charges, and Louis Gallo, a former vice president of COL. The defendants are alleged to have raised about $27.5 million from investors, selling what they claimed were participations in pre-sold physical commodity deals. The company also sold memberships in COL. In fact, little of the investor funds were put into commodities. Rather, the funds were largely misappropriated by the defendants and used to pay other investors. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). The U.S. Attorney’s Office filed a parallel criminal action. Last year the Commission brought an action against the companies and obtained an order freezing the assets and the appointment of a receiver. This case is in litigation. See also Lit. Rel. No. 22472 (Sept. 6, 2012).
Insider trading: SEC v. Fraser, Civil Action No. CV 12-7574 (C.D. Ca. Filed Sept. 5, 2012). This is an action against Renee Fraser, the founder and chief executive officer of public relations firm Fraser Communications. On October 14, 2009 East West Bancorp or EWBC contacted the firm in connection with what is described as an “FDIC assisted transaction.” Confidentiality agreements were requested and obtained from the communications company and six of its employees the next day when the firm was retained. On October 16, 2009, Ms. Fraser purchased 10,000 shares of EWBC through her brokerage account at an average price of about $9 per share. Less than one month later, on November 6, 2009, EWBC publically announced the acquisition of United Commercial Bank’s banking operations in an FDIC assisted transaction. Ms. Fraser sold her shares on two different dates obtaining profits of $43,868. She settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). Ms. Fraser also agreed to pay $43,868 in disgorgement along with prejudgment interest and a penalty equal to the amount of the disgorgement. In addition she agreed to be permanently barred from serving as an officer or director of a public company.
Financial fraud: SEC v. China Sky One Medical, Inc., Civil Action No. CV12-7543 (C.D. Cal. Filed Sept. 4, 2012) is an action against the company and its CEO, Yan-Qing Liu. The company, or CSKI, conducts business through subsidiaries in the Peoples Republic of China. In May 2006 CSKI conducted a reverse merger. Its shares were traded on NASDAQ Global Market. CSKI makes and sells Chinese medical, health and beauty products, including pain relief and weight loss patches. In its Form 10-K for 2007 and a subsequent 10-Q the company reported it had entered into a strategic distribution agreement with Takasima Industries (M) Sdn. Bhd., a fitness equipment manufacturer and retailer based in Penang, Malaysia. Under the agreement Takasima would become an exclusive sales agent of CSKI’s slim patches in Malaysia. The agreement was supposed to produce about US $12 million in annual sales in 2007 with a net profit margin of about 20%. In 2007 CSKI recorded about $12.2 million in sales from exports to Malaysia. In 2008 those sales totaled about $7.5 million. The sales were false, according to the complaint, resulting in an overstatement of net income in 2007 by about 33.1% and 8.9% for 2008. The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation. See also Lit. Rel. No. 22470 (Sept. 4, 2012). A related proceeding was filed against the company under Exchange Act Section 12(j). In the Matter of China Sky One Medical, Inc., Adm. Proc. File No. 3-15005 (Sept. 4, 2012).
Insider trading: SEC v. Lim, Civil Action No. 12-cv-6707 (S.D.N.Y. Filed Sept. 4, 2012) is an action against Mr. Lim allegeing that in 2009 and 2010 he obtained inside information about an upcoming quarterly earnings announcement for Nvidia from a friend who worked at the company. That information was transmitted to another friend, hedge fund manager Danny Kuo, who in turn passed it to others. Mr. Kuo and his tippees traded, avoiding losses of over $15.9 million. Mr. Lim continued to pass inside information to Mr. Kuo in return for $15,000 and other stock tips. Mr. Kuo continued to pass the information to other professionals. In April and May 2009, for example, Mr. Lim obtained inside information on Nvidia’s first quarter financial results which he furnished to Mr. Kuo. Mr. Kuo traded and passed the information to analysts at Diamonback Global and Level Global who, respectively, made profits of at least $73,000 and avoided losses of at least $15.6 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The U.S. Attorney has filed a parallel action. The case is in litigation. See also Lit. Rel. No. 22471 (Sept. 5, 2012).
False press releases: SEC v. Welch, Civil Action No. 1:12-cv-3034 (N.D. Ga. Filed Aug. 31, 2012) is an action against Anthony Welch, a former investment adviser who was also the Chairman and CEO of eHydrogen Solutions, Inc., and ChromoCure, Inc., two defunct microcap companies. From March through August 2010 the defendant issued a series of false press releases touting the medical products of the company. The releases were false and misleading and issued to hype the stock. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See also, Lit. Rel. No. 22463 (Aug. 31, 2012).
Financial fraud: In the Matter of Jay T. Comeaux, Adm. Proc. File No. 3-15002 (Aug. 31, 2012), In the Matter of Daniel Bogar, Adm. Proc. File No. 3-15003 (Aug. 31, 2012) and In the Matter of Jason A. D/Amato, Adm. Proc. File No. 3-15004 (Aug. 31, 2012) are all proceedings against former employees of companies controlled by convicted Ponzi schemer Robert Allen Stanford. The first names as a Respondent Jay T. Comeaux, the president of Stanford Group Company or SGC (a registered broker dealer and investment adviser) from January 1996 to March 2005 and its executive director from March 2005 to February 2009. The second names as Respondents: Daniel Bogar, former President of SGC from March 2005 through 2009 who had previously overseen the merchant banking group from 2000 through 2005; Bernerd E. Young, COO of SGC from 20006 through 2009; and Jason Green who held several positions with SGC including senior v.p., financial planning from 1996 – 20001, senior managing director from April 2001 to January 2007 and president, Private Client Group at SGC from January 2007 through February 2009. The third named as a Respondent Jason A. D’Amato. He held various positions with SGC and Stanford Capital Management, LLC or SCM beginning May 2003 and continuing through February 2009. Those included one in which he managed a proprietary mutual fund wrap program known as Stanford Allocation Strategies or SAS.
The Comeaux and Boger proceedings center on allegations regarding the sale of certificates of deposit or CDs issued by SID beginning as early as 1998. Critical to those sales were representations regarding the investments of SIB which were suppose to be in liquid securities. Those representations also claimed that its insurance program was better than the FDIC. In fact the representations were false. Mr. Comeaux knew that SIB would not disclose the details of its investment holdings to him or other SGC executives or representatives. Despite this fact he and others used marketing materials which trumpeted the diversified holdings of the bank in marketable securities and the claimed insurance. The Order in the Comeaux proceeding alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2).
Messrs. Bogar, Young and Green conducted due diligence regarding SID and the CDs, according to the Order in Boger. As a result of their investigations they learned: that SGC refused to permit a review of its investment portfolio; that there was no private insurance; and that SGC financial advisers had long-standing concerns about the auditors for SIB. Messrs Bogar and Young also knew, or were reckless in not knowing, of other misstatements and omissions regarding SIB. Nevertheless, Respondents Bogar and Young reviewed and approved offering documents and trading materials used by SGC to market its CDs to U.S. investors which contained representations regarding the SIB investment portfolio and insurance program. Respondent Green marketed and sold millions of dollars of SIB CDs using the misleading documents and, in addition, made other oral misrepresentations. The Order alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(c)(1) and Advisers Act Sections 206(1) and (2).
Finally, the D’Amato proceeding is based on the sale of interests in the Stanford Allocation Strategies proprietary mutual fund wrap program for SCM and SGC. In 2000 SGC started offering a mutual fund allocation program through its investment advisory group. Mr. D’Amato began as an assistant analyst with SGC in May 2003. As part of his duties he calculated the returns of the product in 2004 compared to the S&P 500. The backtested models consistently outperformed the S&P 500 by a significant margin. By 2006 clients complained that their returns were nothing close to those recorded in the materials. While the performance data for 2000 through 2004 could not be verified and in fact SGC could not identify any records substantiating performance for that period, the claimed results were included in new pitch books with a disclaimer for that period. The material for the unverified period was set along side of those for 2005 which had been verified. This was misleading, according to the Order. Mr. D’Amato knew that the 2000 to 2004 data was calculated differently than information for later years and that labeling the composite data as “historical performance” in sales materials was misleading. He also knew that the claimed returns for 2000 to 2004 were not realistic but failed to disclose these facts to clients. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2) and Section 207.
Only Mr. Comeaux settled. He consented to the entry of a cease and desist order based on the Sections cited in the Order and to the entry of an order barring him from the securities business and from participating in a penny stock offering. Issues regarding disgorgement and civil penalties will be resolved in a future proceeding. At that time the extent to which his assets are subject to the control of the court-appointed receiver in the Commission’s enforcement action against Robert Allen Stanford will be credited against any monetary sanctions. The other to proceedings will be scheduled for hearing.
The SFO announced that John Hirst, Richard Pollet and Linda Hirst had, respectively been sentenced to prison terms of up to nine years, six and one half years and two and one half years. Mr. Hirst had pleaded guilty to conspiracy to defraud and two counts of money laundering. Mr. Pollet was found guilty by a jury of conspiracy to defraud. Ms. Hirst was found guilty in the same trial of three counts of money laundering. Two other defendants were acquitted of money laundering charges. The underlying case centered on a scheme to lure investors into purchasing interests in Gilher, Inc., a firm that was suppose to invest in the NYSE Dow Jones index and create returns of 20% to 30% each year. In fact it was a fraud.