This edition of This Week In Securities Litigation compiles actions which took place during the recent period when a series articles were published centered on two topics. One focused on director and officer liability while the other concerned SEC actions related to Chinese issuers. Key decisions from the circuit courts for the period which are not included here will be discussed in subsequent articles.
During this period there has been a series of significant securities enforcement actions brought and resolved. Perhaps the most high profile was the verdict in the Brian Stoker market crisis case. There the jury ruled against the Commission but took the unusual step of issuing a statement asking the agency to continue investigating the financial industry.
The Commission also brought a number of other significant cases during this period. They included another insider trading action involving a prominent, retired major league baseball player and an action against an executive at a large pharmaceutical company. The SEC also brought another market crisis action and filed two settled FCPA cases as well as a series of actions entered on a Chinese issuer.
The criminal FCPA case involving former Morgan Stanley employee Garth Peterson also came to a close. Mr. Peterson was sentenced to serve nine months in prison.
Finally, the PCAOB issued is new audit standard regarding auditors and audit committees. The standard is designed to improve communications between the auditor and the committee on key topics.
Municipal securities: The Commission issued what it calls a “comprehensive report” on the municipal securities markets. It contains a series of recommendations regarding the municipal markets which have broad exemptions from securities regulation. The recommendations include a proposal to permit the SEC to set baseline disclosure standards and require municipal issuers to have audited financial statements (here).
Speech: Brian Croteau, Deputy Chief Accountant, Office of the Chief Account, addressed the American Accounting Association Annual Meeting (Washington, D.C., Aug 6, 2012) in remarks titled Policy choices Informed by Root Cause Analysis and the Audit Performance Feedback Loop – Investors are Counting On All Of Us. His remarks covered several topics including the importance of the academic community and the work on audit policy and regulation, the role of root cause analysis and the audit performance feedback loop, global audit policy considerations and legislative activity relating to auditing (here).
SEC Enforcement: Litigated cases
Market crisis: SEC v. Stoker, Case No. 11Civ. 7388 (S.D.N.Y. Filed Oct. 19, 2011) is the action against a Citigroup employee involve in the creation of the synthetic collateralized debt obligation called Class V Funding III that is at the center of the Commission’s market crisis action involving Citigroup, SEC v. Citigroup Global Markets, Inc., Case No. 11-Civ-7388 (S.D.N.Y. Filed Oct. 19, 2011). On August 2, 2012 a jury returned a verdict, concluding that Mr. Stoker was not liable.
The case centered on the claim that Citi had determined that the residential real estate market would drop significantly. Accordingly, in late 2006 it constructed a CDO-squared – a CDO collateralized by tranches of other CDOs rather than instruments such as bonds – tied to the residential real estate market. The collateral would be largely CDO tranches left from earlier deals. As collateral manager Citigroup engaged Credit Suisse Alternative Capital, Inc. or CSAC. An experienced collateral manager was essential to selling the notes. Citigroup selected most of the collateral for Class V, although CSAC did select some. The marketing material with which Mr. Stoker was involved featured CSAC and its experience without disclosing Citibank’s role in selecting the collateral or that it had a $500 million short position against the Class V collateral it selected. Class V collapsed only months after the notes were sold, leaving investors with millions of dollars in losses. The complaint alleged violations of Securities Act Sections 17(a)(2) and (3).
In returning its verdict the jury took the most unusual step of issuing a statement noting in part that “This verdict should not deter the S.E.C. from continuing to investigate the financial industry . . . “ In post trial interviews jurors stated that they found the conduct of Citi appalling but they felt that Mr. Stoker was a scapegoat. See, e.g., Peter Lattman, SEC Gets Encouragement From Jury That Ruled Against It, New York Times (Aug. 3, 2012).
Although the SEC settled with Citi, the court declined to approve the proposed consent degree. The SEC appealed the ruling and the matter is now pending before the Second Circuit Court of Appeals.
SEC Enforcement: Filings and settlements
Statistics: This week the Commission filed 17 civil injunctive actions and 7 administrative proceedings (excluding follow on and 12j actions).
Insider trading: SEC v. Mazzo, Case No. SACV – 121327 (C.D. Cal. Aug 17, 2011) is an action against James Mazzo, David Parker and Eddie Murray. Mr. Mazzo was the Chairman and CEO of Advanced Medical Optics, Inc. and is an executive officer of Abbott Laboratories, Inc. He is also a close friend and neighbor of retired major league baseball player Doug DeCinces. Mr. Parker is in the private equity business. Eddie Murray is also a retired major league baseball player. This action is related to SEC v. DeCinces, Case No. SACV 11-1168 (C.D. Cal. Filed Aug. 4, 2011) which was settled at the time of filing. That case named as defendants Mr. DeCinces and three of his friends, physical therapist Joseph Donohue, real estate attorney Fred Jackson and businessman Roger Wittenbach. Collectively the defendants paid over $3.3 million in connection with the settlement. See also Lit. Rel. No. 22062 (Aug. 4, 2011).
Both cases center on the January 12, 2009 announcement that Abbott Laboratories had agreed to acquire Medical Optics through a tender offer. Mr. Mazzo, tipped Mr. DeCinces who traded and, in turn, tipped Messrs. Parker, Murray, Donohue, Jackson and Wittenbach, all of whom traded. Collectively, the defendants in this and the related action realized profits of $2,400,275. The complaint in the Mazzo action case alleges violations of Exchange Act Sections 10(b) and 14(e). Mr. Murray agreed to settle with the Commission, consenting to the entry of a final judgment permanently enjoining him from violating the Sections cited in the complaint. He also agreed to pay disgorgement of $235,314, prejudgment interest and a penalty of $117,657. The other two defendants did not settle. See also Lit. Rel. No. 22451 (Aug. 17, 2012).
Investment fund fraud: SEC v. Donnan (N.D. Ga. Filed Aug. 16, 2012) is an action against college football hall of fame coach and ESPN commentator Jim Donnan and his business manager Gregory Crabtree. It alleges that from August 2007 through October 2010 the defendants raised over $80 million from 97 investors who were told that the funds were invested through GLC Limited which was supposed to be in the wholesale liquidation business. This business would yield high returns investors were assured and was safe because the products were often pre-sold. In fact little of the money was invested and much was siphoned off for other purposes, including making Ponzi type payments to investors. The complaint alleges violations of Securities Act Sections 5 and 17(a)(1), (2) and (3) and Exchange Act Section 10(b). The case is in litigation.
Investment fund fraud: SEC v. Bridge Premium Finance, LLC, Civil Action No. 1:12-cv-02131 (D. Colo. Filed Aug. 15, 2012) is an action against the company, Michael Turnock and William Sulivan II. It alleges that the defendants have raised at least $15.7 million from more than 100 investors who purchased promissory notes. Those notes were supposed to pay annual returns of up to 12%. The funds were to be invested in loans to small businesses to pay their up-front annual commercial insurance premiums. While investors were repeatedly told that the company was “doing great,” in fact it had not been profitable since 1998, had lost over $3 million in the last five years and had been making Ponzi type payments to investors for over a decade. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). It also alleges that Mr. Turnock is liable as a control person under Exchange Act Section 20(a). The court granted the Commission’s request for a temporary restraining order and asset freeze order. See also Lit. Rel. No. 22449 (Aug. 15, 2012).
Offering fraud: SEC v. Petro-Suisse Ltd., Civil Action No. 12-CV-6221 (S.D.N.Y. Filed Aug. 14, 2012) is an action against the company and Mark Gasarch alleging that from 2003 through 2006 they sold interests in 21 limited partnerships through the use of fraudulent private placement memoranda. Specifically, investors were told in the PPMs that their funds would be invested under written agreements entered into by the partnerships to finance the drilling of oil wells in Trinidad. The partnerships were then to receive certain contractual rights. In fact the partnerships never entered into any such agreements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The company settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. Mr. Gasarch consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, under the settlements the defendants are jointly and severally liable to pay disgorgement in the amount of $8,370,000, deemed satisfied by the previous payments made by the company to the limited partnership investors. Mr. Gasarch also agreed to pay a civil penalty of $130,000. See also Lit. Rel. No. 22448 (Aug. 14, 2012).
Offering fraud: SEC v. Avanti Capital Partners, LLC, Civil No. 2:12-cv-788 (D. Utah Filed Aug. 13, 2012) is an action against Ivan Brown and two companies he controls, Highland Residential, LC and Avanti Capital Partners, LLC. Mr. Brown is alleged to have raised over $27 million from at least 93 investors since 2004 by selling unregistered promissory notes in Highland and Avanti. Investors were told that their funds would be used to make bridge loans to individuals buying or building a residence. The investments were to have little or no risk. In fact much of the money was diverted to the personal use of Mr. Brown, to other investments and to make Ponzi like payments. The complaint, which is in litigation, alleges violations of Securities Act Sections 5 and 17(a)(2) and Exchange Act Section 10(b).
Shell creation scheme: SEC v. Coldicutt, Case No. 4:12-CV-00505 (E.D. Tex. Filed Aug. 13, 2012) is an action against Thomas and Elizabeth Coldicutt, Robert Weaver, Jr., Christopher Greenwold, Linda Farrell and Suzana Gomez. Essentially, the complaint alleges that the husband and wife team of Thomas and Elizabeth Coldicutt, with the assistance of the other defendants, conducted a shell creation factory in which they created and sold a number of public shell companies. To implement the scheme they retained nominee directors and officers who were secretly funded and created false documents that were filed with the OTC Bulletin Board and the Commission to give the entities the appearance of legitimacy. Typically, the companies appeared to be pursuing mining activities when in fact they had not conducted any such activities. The defendants obtained nearly $6 million in ill-gotten gains from the scheme. The complaint, which is in litigation, alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(d).
Market crisis: In the Matter of Wells Fargo Brokerage Services, LLC, is a proceeding against the registered broker-dealer subsidiary of Wells Fargo & Co., and Shawn McMurtry, formerly a registered representative with the firm. From January 2007 through August of that year the firm made recommendations and sold Structured Investment Vehicles or SIVs to certain institutional customers without obtaining sufficient information and understanding about the nature and risk of the products. SIVs are complex investment vehicles backed largely by high-risk mortgage-backed securities or MBS and collateral debt obligations or CDOs. The recommendations and sales were made without reviewing the private placement memoranda and were based almost exclusively on the credit ratings. This was done despite the extensive disclosures in the PPMs against such actions. Accordingly, the Order alleges that that Wells Fargo and its representatives failed to have a reasonable basis for their recommendations or to disclose to their institutional customers the risks associated with the investment vehicles. Mr. McMurtry exercised discretionary authority in violation of Wells Fargo’s internal policies and selected the particular issuer of asset-backed commercial paper for one long-standing municipal customer. Wells Fargo’s conduct created significant risk for it customers and in some instances substantial loses when three SIV-issued asset-backed commercial paper programs which were backed largely by MBS and CDOs, defaulted. The Order alleges violations of Securities Act Sections 17(a)(2) and (3).
Respondents settled the action. Both Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Wells Fargo agreed to the entry of a censure and to pay $65,000 in disgorgement along with prejudgment interest and a penalty of $6.5 million. Mr. McMurtry will be suspended from the securities business for a period of six months and pay a civil penalty of $25,000. The firm, according to the Order, has taken a number of remedial measures since 2007 to ensure that its registered representatives have adequate information about investments and that it is disclosed to customers.
Fraudulent disclosure statement: SEC v. Brooks, Civil Action No. 3:12-cv-2716 (N.D. Tx. Aug. 9, 2012) is an action which charges Ronald Brooks, CEO of Standard Oil Company USA, Inc. with violating Exchange Act Section 10(b). Mr. Brooks falsely stated in a disclosure statement filed with the Pink OTC Markets and made available to investors that he had no prior criminal convictions. In fact he had three, including two for securities violations. The action is pending. See also Lit. Rel. No. 22442 (Aug. 10, 2012).
Boiler room scheme: SEC v Labartor, Case No. 1:12-cv-11489 (D. Mass. Aug. 10, 20120) is an action against Edward Maborto, Johathan Fraiman, Mathew Lazar and seven entities controlled by Laborio. Messrs. Laborio and Fraiman are alleged to have made a series of misrepresentations and misleading statements to investors about the Envit Companies’ businesses, revenues, financial projections, the use of investor funds and the historical return of hedge fund Envit Fund. In addition, about $585,000 was raised from 10 investors through the sale of a PIPE offering in the Envit Group by falsely claiming that it had a guaranteed annual dividend of 8.5%. The complaint alleges violations of Securities Act Sections 5 and 17(a), Exchange Act Sections 10(b), 15(a)(1) and 16(a) , Advisers Act Sections 206(1) and (2) and Section 206(4) and Section 7(a) of the Investment Company Act. The case is in litigation. See also Lit. Rel. No. 22444 (Aug. 10, 2012).
Failure to produce records: In the Matter of Peak Wealth Opportunities, LLC, Adm. Proc. File No. 3-14979 (Aug. 10, 2012) is a proceeding which names as Respondents, the registered investment adviser and its sole managing member, David W. Dube, CPA. Peak Wealth is the investment adviser to the StockCar Stocks Index Fund, the sole series of the StockCar Stocks Mutual Fund, Inc. During an inspection the staff requested that certain records be made available. At the same time, the fund’s board also requested information from Peak Wealth and Mr. Dube as part of its required annual evaluation of its advisory agreements. The Respondents failed to produce the requested materials for either the staff or the board. The Order alleges violations of Advisers Act Sections 203A and 204 and Section 15(c) of the Investment Company Act. The action is proceeding to hearing.
Insider trading: SEC v. Dunn, Civil Action No. 09-cv-2213 (D. Nev. Nov. 19, 2009) is an action against R. Brooke Dunn, a former executive at Shuffle Master, Inc., and Nicholas Howey. The original case alleged that after learning that the company would have disappointing earnings in February 2007 Mr. Dunn telephoned Mr. Howey with the information. Mr. Howey then sold all of his Shuffle Master stock. After the announcement Mr. Howey sold all of his Shuffle Master puts which he had purchased the prior day. Previously, the two defendants had settled with the Commission, consenting to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b), and agreeing to pay disgorgement and a civil penalty. The question of whether an officer director bar should be imposed as to Mr. Dunn had been reserved for the court. On July 30, 2012 the court announced that a five year bar would be imposed beginning on November 19, 2009 when the Commission filed its complaint. See also Lit. Rel. No. 22439 (Aug. 8, 2012).
Pump and dump: SEC v. Heart Tronics, Inc., Case No. 11-cv-01962 (C.D. Cal. Filed Dec. 20, 2011) is an action against the company and six individuals in connection with a series of fraudulent schemes pumping the stock of the company. In part the scheme involved the repeated announcement of fictitious sales orders. Subsequently, Mitchell Stein, the purported outside counsel for the company, was indicted and the Commission’s action was stayed. Two defendants in the action, Martin Carter and Ryan Rauch settled with the Commission. Mr. Carter, who previously pleaded guilty to one count of conspiracy, consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5). He also agreed to the entry of a penny stock bar. Disgorgement and penalties were waived based on Mr. Carter’s financial condition. Mr. Rauch settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(b). He also agreed to the entry of a three year penny stock bar and to pay disgorgement of $15,000 plus prejudgment interest and a civil penalty of $20,000. See also Lit. Rel. No. 22440 (Aug. 8, 2012).
Offering fraud: SEC v. The Companies, LLC, Civil No. 2:12-cv-00765 (D. Utah Filed July 6, 2012) is an action against The Companies and its principals, Kristoffer Krohn, Stephen Earl and a former officer, Michael Krohn. The Companies and its related entities purchased distressed real estate. Beginning in January 2009, and continuing through June 2011, the company and its subsidiary raised about $11.9 million from 169 investors in four unregistered offerings. The private placement memoranda, content for which was obtained and approved by Kris and Mike Krohn and Mr. Earl, contained material misrepresentations. The offerings also failed to qualify for a Reg. D, Rule 506 exemption because the defendants solicited investors in a general solicitation at meetings that were open to the public. The defendants resolved the case by consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Sections 5 and 17(a). The Companies also agreed to inform all investors about the final judgment, provide audited financial statements and to offer the return of the consideration paid. Chris and Mike Krohn and Mr. Earl also each agreed to each pay a civil penalty of $75,000. See also Lit. Rel. No. 22437 (Aug. 7, 2012).
Misappropriation: In the Matter of Lewis J. Hunter, Adm. Proc. File No. 3-14974 (Aug. 7, 2012) is an action against former registered representative Lewis Hunter who was employed at registered broker-dealer HD Vest Investment Securities, Inc., Irving, Texas. The Order alleges that Mr. Hunter used his position as a registered representative to misappropriate the funds of two clients in 2010. Specifically, as to “Victim I” Mr. Hunter transferred $150,000 and later another $100,000 from the person’s brokerage account. Ultimately the funds were used for Mr. Hunter’s benefit. When confronted by Victim I Mr. Hunter claimed the funds were invested in Guaranteed investment Certificates issued by HSBC Bank Canada that paid interest monthly of 15% for two years. Although Victim I was shown certificates, they were a fabrication. Mr. Hunter also took $54,000 from Victim 2, supposedly for an investment in US Bank. Again however the funds were ultimately used for Mr. Hunter’s personal benefit. The Order alleges violations of Securities Act Sections 17(a)(1), (2) and (3) and Exchange Act Section 10(b). The proceeding will be set for hearing.
Insider trading; SEC v. McVicker, 12-CV-11434 (D. Mass. Filed Aug. 3, 2012) is an action against Joseph McVicker who is alleged to have traded in the securities of Art Technology Group, Inc. while in possession of material non-public information. Specifically, the compliant alleges that prior to the November 2, 2010 announcement that the company would be acquired by Oracle Corporation, Mr. McVicker learned about the deal from a close friend. Although he understood that the information was confidential and not to be used to trade, he purchased shares of Art Technology. When the deal was announced the share price increased about 45% giving him an ill-gotten gain of $44,268. To resolve the case, Mr. McVicker consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and to the entry of an order requiring that he disgorge his trading profits and pay prejudgment interest and a penalty equal to the amount of his trading profits. See also Lit. Rel. No. 22434 (Aug. 3, 2012).
Compliance procedures: In the Matter of Consultiva International, Inc., Adm. Proc. File No. 3-14973 (Aug. 3, 2012) is a proceeding against the Puerto Rico based registered investment adviser who has 86 clients and nearly $695 million in assets under management. Over a five year period beginning in 2005 the adviser failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act. In a September 2005 exam the adviser was alerted to deficiencies regarding its compliance program and the competency of its CCO as well as inconsistencies in its Form AVD. At the following inspection in December 2010 some points had been remedied but not all. It was also determined that the adviser failed to properly enforce its written code of ethics. The Order alleges violations of Advisers Act Section 206(4). To resolve the proceeding the Adviser consented to the entry of a cease and desist order, a censure and an order requiring the payment of a $35,000 civil penalty and which ordered it to comply with certain undertakings.
Financial fraud: SEC v. Leslie, Civil Action No. C 07-3444 (N.D. Cal.) is a long running financial fraud action against five former officers of Veritas Software Corporation. The complaint, which 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) and the related rules, claims that the defendants engaged in a scheme to artificially inflate the revenue of the firm from 2000 through 2002 by entering into a fraudulent round trip transaction with America-On- Line. This week the court entered a final judgment against Kenneth Lonchar, the former CFO of the company, concluding the action. Mr. Lonchar previously consented to the entry of a permanent injunction prohibiting future violations of Exchange Actions Section 10(b) and agreed to pay disgorgement and prejudgment interest in the amount of $300,000 and a civil penalty of $100,000. In a related administrative proceeding he consented to the entry of an order suspending him from appearing or practicing before the Commission as an accountant with the right to request reinstatement after five years from the date of the order. See also Lit. Rel. No. 22432 (Aug. 2, 2012).
Insider trading: SEC v. Ramnerine, Civil Action No. 12-CV-4837 (D. N.J. filed Aug. 2, 2012) is an action against Robert D. Ramnarine, a high-level executive in the treasury department at Bristol-Myers Squibb Co. The Commission’s complaint alleges that Mr. Ramnarie misappropriated material non-public information regarding the involvement of his employer in the acquisitions of Pharmasset, Inc., Amylin Pharmaceuticals, Inc., and ZymoGenetics, Inc. In each instance he purchased options in advance of the deal announcement, netting him trading profits of over $300,000. During the period Mr. Ramnarie conducted internet searches on how to avoid being caught for insider trading. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). The Commission is seeking a freeze of the trading profits. A parallel criminal case has been filed. See also, Lit. Rel. No. 22433 (Aug. 3, 2012).
Financial fraud: SEC v. Siris, Civil Action No. 12-cv-5810 (S.D.N.Y. Filed July 30, 2012) is one of a series of actions related to China Yingxia International, Inc, a now defunct Chinese reverse merger company. This action named as defendants Peter Siris, and his companies, Guerrilla Capital Management, LLC and Hua Mei 21st Century, LLC. Mr. Siris and his entities served as advisers to China Yingxia as well as several other China based entities. He is also the author of several books on investing and manages two New York based funds which invest in U.S. listed Chinese companies. Guerrilla Capital is a management company and Hua Century is a sub-advisor to it. Mr. Siris invested $1.5 million in China Yingxia through the funds he manages. He was one of three consultants to the firm and, along with Hua Mei, helped raise money for it. In the reverse merger Hua Mei received both cash and shares in return for performing due diligence. Portions of the shares came directly or indirectly through a person controlled by the issuer, in a transaction structured to evade the registration provisions of the securities laws, according to the court documents. The shares were sold yielding $24,600 in illicit proceeds. The next year Mr. Siris acted as an unregistered broker in raising over $2 million for an $8.7 million PIPE transaction conducted by China Yingxia. In connection with that deal he was paid $107,500 in transaction based compensation.
As a consultant for the firm Mr. Siris reviewed filings made with the SEC, press releases and was involved in hiring decision. In February 2009, after learning of difficulties at the company from its CEO, including the fact that she had engaged in illegal fundraising in China and that the company had shut down, he sold a substantial number of company shares prior to the public disclose of these events. The next month, after reviewing a draft press release disclosing the matters he increased his selling activity. Overall Mr. Siris sold 1,143,600 shares of China Yingxia yielding profits of $172,000 while in possession of material non-public information. After a press release was issued on March 6, 2009 the share price plummeted and the directors and CFO resigned, effectively ending the operations of the company.
The complaint also alleges that Mr. Siris made misrepresentation to investors in his funds concerning China Yingxia and traded on inside information regarding ten other Chinese issuers. In addition, he is alleged to have directed short sales on the shares of two other Chinese issuers in violation of restrictions prohibiting such sales prior to his funds’ participation in firm commitment public offerings for the companies. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 15(a) and Advisers Act Sections 206(4). Each defendant settled, consenting to the entry of permanent injunctions based on the sections cited in the complaint. In addition, the three defendants have agreed to pay disgorgement in the amount of $592,942.39 along with prejudgment interest. Mr. Siris will also pay a civil penalty of $464,011.93.
A related action was brought against Ren Hu, Alan Sheinwald and Alliance Advisors, LLC. SEC v. Sheinwald, Civil Action No. 12-CV-5810 (S.D.N.Y. Filed July 30, 2012). Mr. Hu became the CFO of China Yingxia in 2008 despite having expressed skepticism about the company. He was also the CFO of several other Chinese reverse merger companies. He signed certifications required by the Sarbanes-Oxley Act of 2002 regarding the controls of the company. Mr. Hu claimed to have participated in the design of the disclosure and internal controls of China Yingxia when in fact it had virtually none. Mr. Sheinwald and his investor relations firm, Alliance Advisors, acted as unregistered securities brokers for China Yingxia in 2007. The complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(B) and 15(a). The case is in litigation. See also In the Matter of Peter Dong Zhou, Adm. Proc. File No. 3-14964 (July 30, 2012)(settled administrative proceeding against a registered representative who helped China Yingxia engage in the unregistered distribution and sale of restricted securities, assisted with the retention of its CFO and insider traded when he learned the company was collapsing; the action settled with a consent to a cease and desist order based on violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b), the imposition of a bar from the securities business and from participating in a penny stock offering with a right to reapply after three years, and an agreement to pay disgorgement of $20,900, prejudgment interest and a penalty of $50,000); In the Matter of Stephen Mazuchowski, Adm. Proc. File No. 3-14965 (July 30, 2012)(settled proceeding based on allegations that the Respondent acted as an unregistered broker for China Yingxia; the action settled with a consent to a cease and desist order based on Exchange Act Section 15(a), a bar from the securities business and from participating in a penny stock offering with a right to reapply after two years and an agreement to pay disgorgement of $126,800, prejudgment interest and a penalty of $25,000); In the Matter of James Fuld, Jr., Adm. Proc. File No. 3-14966 (July 30, 2012)(settled proceeding based on the alleged sale of securities of China Yingxia; based on the Respondent’s cooperation the case was resolved with the payment of disgorgement of $178,594.85 along with prejudgment interest).
Financial fraud: SEC v. LocatePlus Holdings Corporation, No. 1:10-cv-11751 (D. Mass. Filed Oct. 14, 2010) is an action against the company, which prior to its bankruptcy, sold access to on-line data bases, and its former CEO and CFO, respectively, John Latorella and James Fields. The Commission’s complaint, centered on the period 2005 to 2007, alleges that the revenue of the company was fraudulently inflated through transactions with a fictitious customer and a round trip transaction. It also claimsthat the individual defendants manipulated the share price of anther entity they controlled after taking it public through a reverse merger. The company settled with the Commission, consenting to the entry of an injunction which prohibits future violations of Securities Act Action 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B). A financial penalty was not imposed in view of the financial condition of the company. In a related proceeding the company consented to the revocation of its registration under Exchange Act Section 12(j). In the Matter of LocatePlus Holdings Corporation, Adm. Proc. File No. 3-14858 (April 30, 2012). Criminal charges were filed against Messrs. Latorella and Field after the Commission initiated its action. Mr. Latorella pleaded guilty and has been sentenced to 60 months in prison. See also Lit. Rel. No. 22426 (July 30, 2012).
Offering fraud: SEC v. Bodanza, Case No. 1:12-CV-1954 (N.D. Ohio, Filed July 27, 2012) is an action against Michael Bodanza, the former CFO and founding member of Preferred Financial Holdings. Co., LLC, a company formed in 2006 to engage in oil and gas exploration, drilling and leasing. Beginning in June 2007, and continuing through August 2010, Mr. Bodanza and Preferred Holdings raised $6,769,635 from 61 investors through the sale of unregistered Preferred notes. In selling the securities the defendants failed to inform investors that from 2007 through 2009 the company suffered a series of operational difficulties and had losses each year. Likewise, in selling the notes to specific investors the defendants are alleged to have failed to make other material disclosures regarding the operational difficulties of the company. The defendants resolved the case, consenting to the entry of permanent injunctions prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). In addition, the order as to Mr. Bodanza directs the payment of disgorgement in the amount of $359,656 along with prejudgment interest but waives the payment of all but $154,000 based on financial condition. The order as to the company also directs the payment of disgorgement in the amount of $4,485,647 along with prejudgment interest jointly with certain relief defendants who consented to the entry. See also Lit. Rel. No. 22429 (July 30, 2012).
SEC v. Oracle Corporation, CV 12 4310 (N.D. Ca. Filed Aug. 16, 2012) is a settled FCPA action against the software company based on the actions of its subsidiary, Oralcle India Private Limited. Specifically, the complaint states that over a two year period beginning in 2005, the subsidiary “parked” portions of the proceeds from certain sales to the Indian government and “put the money to unauthorized use, creating the potential for bribery or embezzlement.” Over a dozen transactions were structured so that $2.2 million could be held by distributors off the books of the subsidiary. The money was then paid out to vendors, several of whom were mere store fronts. The complaint alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). The company settled the action, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. It also agreed to pay a $2 million civil penalty. The settlement takes into account the fact that Oracle voluntarily disclosed the matter, cooperated with the investigation, made significant enhancements to its FCPA program and terminated the employees involved. See also Lit. Rel. No. 22450.
U.S. v. Peterson (S.D.N.Y.) is the FCPA action involving former Morgan Stanley managing director for real estate in China. Previously, Mr. Peterson pleaded guilty to a one-count criminal information charging him with conspiring to evade internal accounting controls. He was sentenced to serve nine months in prison. Mr. Peterson previously settled with the SEC, agreeing to pay disgorgement and forfeit certain real estate.
U.S. v. Pfizer H.C.P. Corp., Case No. 1:12-cr-00169 (D.D.C. Filed Aug. 7, 20120; SEC v. Pfizer Inc., Civil Action no. 1:12-cv-01303; SEC v. Wyeth LLC, Civil Action No. 1;12-cv-01304 (D.D.C. Filed Aug. 7, 2012). The SEC and the DOJ filed settled FCPA charges involving, Pfizer in the case brought by the SEC or its subsidiary, Pfizer H.C.P., in the DOJ action. In addition, the Commission filed a second settled action against Wyeth LLC which was acquired by Pfizer in 2009.
The actions involving Pfizer stem from conduct dating to 1997. Beginning at that time employees of various subsidiaries made cash payments and provided an array of incentives to bribe government doctors to utilize Pfizer products. In China meetings were held at clubs that had recreational and entertainment activities to reward physicians who were high prescribers of company drugs. In Croatia a bonus program was created for senior officials in government health care programs under which a percentage of the cost of the drugs was remediated to the doctor. Improper payments were also made in Bulgaria, Kazakhstan and Russia. The payments were not properly recorded in the books and records of the company.
The DOJ charged Pfizer subsidiary Pfizer H.C.P. Corporation in a two count criminal information with conspiracy and violations of the FCPA in connection with the payments. That action was resolved when the company agreed to execute a deferred prosecution agreement and to pay a criminal fine of $15 million. The company is also required to report periodically to the DOJ on its compliance and remediation efforts.
To settle with the SEC Pfizer consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B. The company also agreed to pay disgorgement of $16,032,676 in net profits and prejudgment interest. The company is required to report to the SEC for two years on its remediation and compliance efforts.
The SEC also settled FCPA charges with Pfizer subsidiary Wyeth. According to the complaint in that action, the company engaged in FCPA violations primarily before its acquisition but also after. The complaint alleges that subsidiaries marketing Wyeth products in China, Indonesia and Pakistan bribed government doctors to recommend them to patients by making cash payments. In some instances BlackBerrys, cell phones and travel incentives were furnished. Wyeth resolved the charges by consenting to the entry of a permanent injunction prohibiting future violations of the same Sections as Pfizer. The company also agreed to disgorge $17,217,831 in net profits along with prejudgment interest. Its reporting obligations are subsumed in those of Pfizer.
The agreement with the Department recognizes the voluntary disclosure of the matter by Pfizer. The SEC also noted that following the acquisition of Wyeth, Pfizer undertook a risk-based FCPA due diligence review of Wyeth’s global operations and voluntarily reported to the staff. Thereafter the company fully cooperated with the DOJ and the SEC. This resulted in DOJ’s decision not to criminally charge the company. Following disclosure the company conducted a wide-reaching self-investigation of the underlying and related conduct. The company has also made significant and continuing improvement to its global anti-corruption compliance procedures. In addition, Pfizer H.C.P. received a reduced penalty a result of its parent’s ongoing investigation of other companies and individuals.
Communications with audit committee: The Board adopted Auditing Standard No. 16, Communications with Audit Committees. Initially proposed on September 21, 2010 and reproposed on December 20, 2011, the standard is intended to enhance the relevance and timeliness of communications between the auditor and the audit committee. It is designed to foster a constructive dialogue between the two on significant audit and financial statement matters.
Inadequate procedures: The regulator expelled Biremis Corp., formerly known as Swift Trade Securities USA, Inc. and barred its President and CEO, Peter Beck for supervisory violations. The action centers on allegations that from June 2007 to June 2010 the firm and Mr. Beck failed to establish a supervisory system reasonably designed to achieve compliance with laws and regulations prohibiting manipulative trading. In addition, Biremis and Mr. Beck failed to implement an adequate anti-money laundering program despite the fact that they conducted a world wide operation that executed transactions on behalf of day traders. They also failed to maintain a margin system and margin accounts; did not have policies and procedures in place related to the use of margin; and did not prepare customer reserve computations or maintain a special reserve bank account for the exclusive benefit of customers. Finally, the firm placed thousands of short sales orders in violation of emergency orders banning them by the Commission and improperly calculated its net capital.
Investment fund fraud: Defendant John Hirst pleaded guilty to conspiracy to defraud and two counts of money laundering while Richard Pollett was found guilty of conspiracy to defraud and Linda Hirst was found guilty on three counts of money laundering, all in connection with the operation of Gilhner, Inc. While the fund, which raised about £10 million from investors, was supposed to invest in U.S. stocks, in fact it operated as a Ponzi scheme.
Inadequate information: The Securities and Futures Commission issued a reprimand against RBC Investment Management (Asia) Ltd and fined the company HK $4 million in connection with its investment advice to clients regarding a number of funds between November 2006 and July 2008. The regulator concluded that RBC did not provide adequate guidance to its staff on conducting due diligence on the funds prior to making the recommendations; relied on its Singapore office to conduct that due diligence in the absence of any supporting record; failed to have any measure of the overall risk of the investment product it sold; did not record any product suitability assessment; and failed to have adequate procedures in place requiring its representatives to document their investment advice. As part of the resolution RBC is offering to repurchase the interests held by all eligible customers, pay compensation, enact enhanced procedures and engage an independent reviewed.