This Week In Securities Litigation (Week of April 20, 2020)
Regulators in this country and others, including the Commission, have announced accommodations in view of the current pandemic. At the same time, those regulators stress the need for timely disclosure and financial information.
Despite the accommodations, and the fact that large segments of the population is sheltered at home for safety, business moves forward. The Commission, for example, has announced that OCIE will begin inspections after June 30, 2020. Enforcement continues to file new cases while resolving others. This past week actions were filed centered on an a muni bond hearing, scalping, an audit failure and FCPA violations.
There is light on the horizon. Stay safe; stay health.
Whistleblowers: The Commission announced on April 16, 2020 that it has awarded over $27 million to a whistleblower who alerted the agency to misconduct occurring in part overseas. The whistleblower also provided critical investigative leads that advanced the investigation and saved significant agency resources.
Investment Mgt. FAQ: The Division of Investment Management Coronavirus Response FAQs, published April 14, 2020, is available here.
SEC Enforcement – Litigated Actions
False statements: SEC v. Revolutionary Concepts, Inc., Civil Action No. 1:18-cv-01832 (N.D. GA. SJ granted on April 10, 2020) is an action which named as defendants the firm and its senior vice president Solomon RC Ali. The complaint alleged that several sham transactions instigated by Defendants were touted as having a positive impact on the company in press releases. The Court concluded that Defendants had violated Securities Act Section 17(a) and Exchange Act Section 10(b) by making the false statements about the deals and not informing investors that none of the transactions were arms-length. The Court also fund that Mr. Ali failed to comply with his reporting requirements under Exchange Act Section 16(a) regarding the 18 million shares of the firm he controls. Accordingly, summary judgment was entered in favor of the Commission. Remedies will be considered at a future hearing. See Lit. Rel. No. 24796 (April 16, 2020).
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 civil injunctive action and 2 administrative proceedings last week, exclusive of 12j and tag-along actions, discussed below.
Offering fraud: SEC v. Hilliard, Civil Action No. 3:20 -cv-00929 (N.D. Tx. Filed April 16, 2020) is an action against Matthew Hilliard and his entities, Hilliard Oil Ventures, Inc., Hilliard Helium Company, LLC and Hillard Land and Energy Corp. Over a four year period, beginning in July 2015, Defendants raised in excess of $10 million from 117 investors who purchased shares in the offering. Investors were contacted by a group conducting cold calls using a Hilliard supplied script. That script misstated the past performance of the oil-and gas business, how the entities would be managed, the use of the offering proceeds and the projected revenue from the wells. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Defendants settled, consenting to the entry of permanent injunctions based on the sections cited in the complaint. In addition, they agreed to pay disgorgement of $4,806,203 plus prejudgment interest of $310,760 and a penalty of $189,427. See Lit. Rel. No. 24797 (April 16, 2020).
Improper muni bond trading: In the Matter of Boenning & Scattergood, Inc., Adm. Proc. File No. 3-19749 (April 16, 2020) is a proceeding which names as Respondents the registered broker dealer and municipal bond dealer and two of the firm’s representatives, Craig Burdulis and Brian Gillespie. The matter centers on the purchase of new issue municipal bonds between January 2014 and October 2016. During that period the two representatives used what are called “flippers” to acquire new issue bonds. Flippers are not market professionals and as such get priority under the rules of muni offerings when shares are allocated. The flippers obtained the bonds and then sold them to the firm, typically at a predetermined price. This violated Rule G-17 of the Municipal Securities Rulemaking Board and Section 15(a)(1). The firm and Mr. Burdulis also violated MSRB Rule G-237 and Exchange Act Section 15(b)(4)(E) regarding supervision. Respondents undertook a series of remedial efforts which the Commission took into consideration. In resolving the matter Respondents were censured. In addition: Respondent Boenning was ordered to cease and desist from future violations of Sections 15(a)(1) and 15(B)(c)(1); Respondent Gillespi from Exchange Act Section 15(a)(1); and Respondent Burdulis is precluded from acting in a supervisory capacity with a regulated entity. Finally, Respondent Boenning will pay disgorgement of $110,395.14 and prejudgment interest of $20,172.56 along with a penalty of $75,000 and Respondents Burdulis and Gillespi will each pay a penalty of $30,000.
Scalping/manipulation: SEC v. Fiore, Civil Action No. 18-cv-5474 (S.D.N.Y.) is a previously filed action in which the Court entered final judgments by consent against Defendants Joseph Fiore, Berkshire Capital Management and Eat at Joe’s, Ltd. The complaint alleged that Mr. Fiore ran a promotional campaign for a microcap issuer that included recommendations to purchase its stock at a time when he was selling large blocks of securities and engaging in manipulative trading, none of which was disclosed. Defendants consented to the entry of permanent injunctions based on the antifraud, market manipulation and beneficial ownership provisions of the federal securities laws. Mr. Fiore and Berkshire further agreed to be barred for five years from participating in any penny stock offering. Mr. Fiore, in addition, agreed to the entry of a five year officer and director bar. The Defendants will also pay, on a joint and several basis, $2 million in disgorgement and prejudgment interest. Each Defendant will pay a penalty of $500,000. See Lit. Rel. No. 24795 (April 15, 2020).
Audit failure: In the Matter of Schulman Lobel, Zand Katzen Williams & Blackman, LLP, Adm. Proc. File No. 3-19564 (April 15, 2020) is a proceeding against the one time PCAOB registered audit firm centered on its work with regard to an Illinois software maker Firm. Specifically, the firm conducted year end audits for 2013 and 2014 and for the period ended June 30, 2016 on the financial statements of the Firm. That work failed to comply with PCAOB standards since it: Did not properly identify and audit related party transactions; failed to secure sufficient competent evidential matter; did not conduct appropriate procedures to obtain reasonable assurance that the financial statements were free of material misstatements caused by fraud; failed to conduct appropriate procedures upon the subsequent discovery of facts existing at the date of a previous audit report; did not conduct appropriate procedures in connection with a review of interim financial information and failed to properly plan the audit and assess and respond to risks of material misstatements. The firm agreed to a number of undertakings including resigning from existing engagements. The firm also consented to the entry of a cease and desist order based on Exchange Act Section 10A(a)(2) and Rule 2-02(b)(1) of Regulation S-X. It was also censured. Respondent also agreed to pay disgorgement of $24,500 and a civil penalty of $70,000.
SEC v. Berko, Civil Action No. 1:20-cv-01789 (E.D.N.Y. Filed April 13, 2020). Defendant Asante K. Berko is a citizen of the United States and Ghana where he currently resides. Over a period beginning in July 2014, and continuing until December 2016, he was an executive in the U.K. Subsidiary of a New York City based Holding Company whose shares are traded in this country. The Holding Company provided certain services to its clients abroad. The books and records of the Subsidiary were consolidated with those of the Holding Company.
Mr. Berko, as an executive at the Holding Company, was charged with developing investment banking business for that firm and its Holding Company. During the time period here, Mr. Berko sought to bribe various Ghana officials to secure business for a client of the Subsidiary, a Turkish Energy Company. Specifically, Mr. Berko sought to obtain a contract to build and operate an electrical power plant in Ghana for the client. The power would be sold to the Ghanaian government.
In April 2015 Mr. Berko learned that the Energy Company client and the Ministry of Power of Ghana had reached an agreement in principle regarding the terms of a Power Purchase Agreement. Within days the investment banker and his client arranged to transfer $500,000 to the Intermediary Company recruited to participate in the scheme. This was the first of several similar payments. Eventually, Mr. Burko personally paid at least $66,000 to a member of the Ghanaian parliament and other government officials in connection with the transactions.
Steps were taken by Mr. Berko to prevent the Holding Company and Subsidiary compliance personnel from discovering the corrupt scheme. Those were using his personal email rather than the one furnished by the firm and not correcting a document forwarded to the Holding Company representing that the Energy Company did not compensate any intermediaries or politically exposed persons in connection with the Power Plant transaction.
Nevertheless, compliance continued to examine the transaction, uncovered emails of Mr. Berko to Intermediary and eventually unraveled the transaction. The complaint alleges violations of Exchange Act Section 30A only as to Mr. Berko and not against any entity. The case is pending.
Comment: The Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee issued a notice dated April 17, 2020 inviting comment on the issues being faced by the Committee. The submissions must be made by May 14, 2020. Additional information is available here.
Misappropriation: U.S. v. Burroughs, No. 3:19-cr-009292 (D. Conn. Sentencing April 16, 2020) is an action in which Lester Burroughs, the owner of Burroughs Investment Group, a broker-dealer registered with FINRA, was sentenced to serve 33 months in prison followed by 3 years of supervised release after pleading guilty to one count of wire fraud. The scheme began after an investment Mr. Burroughs recommended to a client failed. He then stole $370,000 from an elderly client to pay the nonexistent returns to the other client. When the daughter of the elderly client rejected his effort to cover up the situation with false documents, he paid her with funds misappropriated from other clients. Overall, he stole $575,000. See also SEC v. Burroughs, Civil Action No. 3:19-cv-01913 (D. Conn. Filed Dec. 4, 2019).
CARES ACT: Paycheck Protection Program Frequently Answered Questions, published April 13, 2020, are available here.
MOU: The European Securities Markets Authority announced on April 17, 2020 that it had entered into a Memorandum of Understanding with the Monetary Authority of Singapore under which the European Commission recognized the financial benchmarks used by Singapore as equivalent to those used in the EU. This allows financial institutions in the EU to continue using them as reference rates in their contracts (here).