This Week In Securities Litigation (Week starting July 29, 2019)
A look forward, a look back: “Because that is where the money is” Willie Sutton famously answered when asked why he robbed banks. During a 40 year career he reputedly took in over $2 million – a considerable sum in the early part of the 20th century. And he did it with style – no gun because someone might get hurt, just a soft-spoken man who knew where to go and how to politely ask for what he wanted. (The approach is captured by Robert Redford in The Gentleman Bandit, previewed at Toronto last fall).
Today one might be tempted to think that segments of the federal government are being guided by Willie, just follow the money. Pegging the U.S. dollar as the world reserve currency has long vested the federal government with ample power in international circles. Likewise, the U.S. dollar is the ever-increasing common denominator that brings together federal officials. The dollar, for example, has served as the jurisdictional hook for the federal courts in many cases over the years.
This week’s announcement by FinCEN is just the latest example of this trend. There the regulator issued an advisory on improving the transparency risk regarding Bank Secrecy Act/Anti-Money Laundering supervision (here). The advisory primarily discusses procedures for financial institutions.
FinCEN, money laundering and filing SARs is not just for the few anymore. Money laundering has become the favorite charge against those involved in FCPA actions who are not subject to that statute. A good example is the two Colombian business men charged last week in a Venezuela bribery scheme (here). The statutes have also been used to charge those who may be subject to state law money changing statutes such as crypto assets firms. Broker-dealers and others, of course, have long been subject to the money launder statutes and the requirements to file SARs.
All of this creates an evolving picture of what might be called “regulator creep” – a collection of federal regulators ranging from Treasury and the SEC to the DOJ, CFTC, banking regulators and others tied together through AML and SAR requirements. Willie was right: It is all about where the money is. Now if they could just bring back his style . . .
Whistleblowers: The Commission awarded $500,000 to an overseas whistleblower whose “expeditious reporting helped the Commission bring a successful enforcement action,” according to the release. This award continues an approach the agency has found beneficial. Since the inception of the program the top ten awards range from $50 million, announced on March 19, 2018, to $14 million, announced on September 30, 2013.
SEC Enforcement – Filed and Settled Actions
The Commission filed 2 civil injunctive action and 3 administrative proceedings this week, exclusive of 12j and tag-along actions.
Insider trading: In the Matter of Timothy M. Rooney, Sr., Adm. Proc. File No. 3-19280 (July 26, 2019) is an action which names as a Respondent the financial planner who has been a registered representative and investment adviser. The proceeding centers on insider trading in the shares of Vera Bradley, Inc., a manufacturer of handbags and luggage. Over a period of about one year, beginning in March 2015, Mr. Rooney received material non-public information regarding the financial results of Vera Bradley from a friend at the firm. On four occasions he purchased Vera Bradley shares in his personal accounts prior to the earnings announcement, yielding profits of $139,673. He made similar purchases on three occasions for his wife, mother brother and many customers, yielding profits of $436,071. The Order alleges violations of Exchange Act Section 10(b). To resolve the proceedings Mr. Rooney consented to the entry of a cease and desist order based on the section cited in the Order and to barring him from the securities business and engaging in any penny stock offering. He also agreed to pay disgorgement of $139,673, prejudgment interest of $21,407 and a penalty of $715,417.
Misrepresentation: In the Matter of Chua Seong Seng, Adm. Proc. File No. 3-19279 (July 26, 2019) is a proceeding which names as a Respondent the former CEO and board member of Imperial Plantation. The firm’s state license has been revoked but, at the time of the matters here, it was a shell company. In 2015 Respondent caused his firm to issue one billion shares of stock in a private placement, purportedly in return for $1 million. In fact, there was no such payment. Yet the transaction was announced in filings made with the Commission. The Order alleges violations of Exchange Act Section 10(b). In resolving the matter, Respondent agreed to certain undertakings. He also consented to the entry of a cease and desist order based on the section cited in the Order and to the entry of officer director and penny stock bars. Respondent will also pay a penalty of $15,000.
Conflicts: In the Matter of Foundations Asset Management, LLC, Adm. Proc. File No. 3-19266 (July 24, 2019) is a proceeding which names as Respondents the registered investment adviser, its founder Michael Schamburger, and managing principal Rob Wedel. Over a three year period, beginning in 2013, each Respondent acted as an unregistered broker, soliciting clients to invest in the securities of Alaska Financial Company III, LLC, a real estate firm. In addition, Respondents’ compensation was not properly disclosed. The Order alleges violations of Exchange Act Section 15(a) and Advisers Act Sections 206(2) and 207. To resolve the proceedings, each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order exceptthe order regarding Mr. Wedel does not include section 207. The firm also agreed to certain undertakings and the entry of a censure. The advisory will pay disgorgement of $253,784, prejudgment interest of $25,163 and a penalty of $85,000. Messrs. Shamburger and Wedel will each pay a penalty, respectively of $50,000 and $25,000.
Offering fraud:SEC v. Smith, Civil Action No. 2:19-cv-00519 (D. Utah Filed Jul 23, 2019). Twenty-nine year old Landon Smith is the managing member and owner of J&L Real Estate Group. Over a two-year period, beginning in late 2016, his business enterprise took in over $2.6 million. The business was straight forward. He was a real estate “wholesaler.” As such Mr. Smith claimed to have the opportunity to earn significant returns on property deals. As a wholesaler it was Mr. Smith’s job to locate suitable properties, negotiate the price and contract, put up the earnest money and maintain the deal until it closed. The earnest money is where the public got its chance, according to Mr. Smith. He permitted individual investors put-up the required sum. Mr. Smith would, of course, be responsible for holding funds on deposit. If things went well the returns would be substantial. If not, the returns would be nominal. To support his claims Mr. Smith showed the would-be investor documents pertaining to the properties. Those legal documents mirrored the investment and the real estate deal, giving validity to the transaction. Not quite. There were no deals. There were no investments. There were no properties. There were no investor profits. There were personal items purchased for Mr. Smith -trips to places like Hawaii and, overall, the good time for Mr. Smith. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a)(1). The case is pending. The Utah U.S. Attorney’s Office announced a parallel criminal action.
Insider trading: SEC v. Loman, Civil Action No. 2:19-cv-06187 (C.D. Calif. Filed July 18, 2019). Defendant Mark Loman is the former Controller and Vice President of Finance of OSI Systems, Inc., a security, healthcare and optoelectronics company. Through his position with the firm, Mr. Loman had access to a stream of confidential company financial information. Shortly after the beginning of the firm’s 2016 fiscal year in August 2015, OSIS issued a revenue forecast. By later in the quarter it was clear that the actual results for the period would not meet forecast. On December 28 Mr. Loman purchased 100 put options on OSIS common stock with a strike price of $90. He also sold 100 call options on the firm’s stock with a strike price of $95. One month later, on January 27, 2016, OSIS announced its financial results for the second fiscal quarter – they were below projection. The firm also released its forecast for the fiscal year. Following the release, the share price dropped from about $80 to $52. Mr. Loman sold the put options and let the call options expire. Collectively, he realized $300,000 in trading profits on the transactions. The next month Mr. Loman learned that OSIS was in negotiations to acquire publicly traded American Science and Engineering, Inc. On February 16, 2016, he discussed the acquisition with the company CFO who forward him the letter of intent. That letter stated that ASEI would be acquired for $32 to $38 per share. As the deal negotiations continued Mr. Loman purchased ASEI shares at $24.91 per share. The acquisition was announced on June 21, 2016. The price was $37 per share. The share price of ASEI’s stock rose to $36.96 by June 23, 2016. Mr. Loman sold his ASEI shares early on the morning of June 21, 2016, just prior to the deal announcement, making profits of $100,000. In testimony before the staff Mr. Loman invoked his Fifth Amendment privilege. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24540 (July 18, 2019).
Crypto currency/offering fraud: U.S. v. Thompson (E.D.N.Y. Filed July 25, 2019). Defendant Jon Thompson is the principal of Volantis Market Making LLC. Mr. Thompson and his firm introduce investors to crypto currency through transactions which are guaranteed against risk; guaranteed against lost. The transactions were simple and illustrated by his most recent transactions. Company A decides in June 2018 to invest in bitcoin but has no experience. On the other side of this transaction is supposed to be a counter-party that wants to invest bitcoin in U.S. currency. Volantis and Jon are the perfect parties to contact. They step forward and agree with Company A to hold the U.S. currency until the buyer arrives. Then an exchange will take place. Everyone is guaranteed; everyone is safe and secure. After Company A furnishes Mr. Thompson and Volantis with the U.S. currency, the bitcoin does not arrive, however. Excuses are offered for the delay. Records are produced assuring everyone about the transaction. No bitcoin; no counter-party; and no money. A short time later – July 2018 – Company B wants to invest U.S. dollars in bitcoin but has no experience. Jon and Volantis steps forward and agrees to hold the cash pending the exchange. There is a guarantee against loss. The cycle with Company A repeats. Jon is charged in a criminal complaint with conspiracy, commodity fraud and wire fraud. The investor cash is gone. The case is pending.
In the Matter of Microsoft Corporation, Adm. Proc. File No. 3-19260 (July 22 2019). The case is built on the interaction, and at times inaction, of Microsoft’s subsidiaries and systems – Microsoft Magyarorszag Kft. or MS Hungary, Microsoft Ireland Operations Ltd or MIOL and other subsidiaries in Arabia, Turkey and Thailand. Microsoft does not directly enter into contracts with end customers. Rather, in certain foreign countries, it operates through a subsidiary. Its software licenses in certain volume-licensing programs, for example, are sold through distributor and/or third party resellers called a Licensing Solution Partner or LSP – the approval person. The firm does have estimated retail prices for its software. To maintain consistency with its LSPs in tenders, MIOL offers standard discounts to approved LSPs that reflect a built-in margin. In certain instances, the discounts can be lowered but approvals are required. The firm also sells consulting and other services which subsidiaries typically secure through subcontract with third parties. Firm policies also required that appropriate transactional records be maintained in sufficient detail.
Collectively, the firm’s policies and procedures were designed to ensure compliance with the applicable provisions of the Exchange Act. Yet here, in certain instances, they failed to halt inappropriate practices. For licensing transactions in Hungary over a two-year period beginning in 2014, for example, the managers and employees obtained approvals for discounts to LSPs. The company did not, however, have adequate procedures to determine if the requests for the discounts were legitimate and, when they were, if the discounts were passed on. In fact, these discounts were used to make improper payments and secure over $13.7 million in in business.
The Hungry subsidiary had a similar issue with services. During the same two-year period it entered into two separate agreements regarding the provision of services. The work was subcontracted out. Yet there is little evidence of what work was performed. This is contrary to Microsoft policies.
In Saudi Arabia the local subsidiary had a similar problem with discounts and records. For example, about $400,000 of funds intended to be used for marketing and developing proposals turned into a slush fund paying for gifts to government employees. The fund was financed though larger than usual discounts and aided by records that did not properly track the cash.
Finally, the subsidiaries in Thailand and Turkey also experienced difficulties. In Thailand over $100,000 gifts were furnished to employees of non-governmental banking customers by using funds intended for certain training and recorded under false documents. In Turkey a non-authorized LSP was used in conjunction with an additional and unauthorized discount to pay a government customer. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
In resolving the matter, the Commission considered the fact that although the company did not self-report it did cooperate and take certain remedial actions. In addition, Microsoft entered into a three-year non-prosecution agreement with the DOJ and, after making admissions, paid a criminal penalty of $8,751,795.
To settle with the Commission, the company consented to the entry of a cease and desist order based on the sections cited in the Order. The company will also pay disgorgement of $13,780,733 and prejudgment interest of $2,784,41792.
Consultation: The Securities and Futures Commission announced the results of a consultation with the Stock Exchange of Hong Kong Limited regarding back door listings. A joint consultation paper has now been published reflecting the group’s approach to these issues that is available here (July 26, 2019).
Corruption: The court entered an order regarding the former Business Development Manager at Alstom Power Ltd. The Manager previously pleaded guilty to bribing officials at a Lithuanian power station two win two contracts regarding €240 million. Judge Beddoe directed the former Alstom manager to pay £410K.
Caution: The Monetary Authority of Singapore cautioned wealth managers against aggressively marketing their services or making other efforts to solicit clients from Hong Kong based on the current political difficulties there. (July 12, 2019).