The Commission continued with broken windows this week. Twenty Rule 105 short selling cases were filed in a group. Last week another group of broken window type cases was filed based on the failure to file Form 4s and Schedule 13Ds.
In addition, the SEC brought cases centered on a pump and dump scheme; undisclosed principal transactions at an advisory; misappropriation at an advisory; insider trading by a law firm IT employee; an investment fund fraud case; and net capital violations by a high speed trading firm.
Remarks: Chair Mary Jo White addressed the 2014 SRO Outreach Conference, delivering remarks titled Collaboration, Cooperation and Oversight, Washington, D.C. (Sept. 17, 2014). Her remarks covered cooperation, the SRO rule filing process and the National Exam Program (here).
Remarks: Commissioner Daniel M. Gallagher delivered remarks titled What Happened To Promoting Small Business Capital Formation? Washington, D.C. (Sept. 17, 2014). His remarks focused on capital formation for small issuers, Regulation D, holding individuals accountable and creating an office to advocate for small business (here).
Remarks: Chair Mary Jo White delivered remarks entitled Completing the Journey: Women as Directors of Public Companies, Washington, D.C. (Sept. 16, 2014). Her remarks reviewed the history of women in the board room and next steps that need to be taken (here)
Remarks: Commissioner Daniel M. Gallagher addressed the 2014 SRO Outreach Conference, Washington, D.C. (Sept. 16, 2014). He discussed the on-going review of equity market structure and the need to evaluate the SROs (here).
Initiative: The Commission announced that the agency and the SBA will partner on events on small business capital raising under the JOBS Act (Sept. 16, 2014)(here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the SEC filed 3 civil injunctive action and 24 administrative proceedings, excluding 12j and tag-along-actions.
Manipulation: SEC v. Cope, Civil Action No. 14-CV-7575 (S.D.N.Y. Filed September 18, 2014) is an action against Jason Cope, Izak Zirk de Maison, Louis Mastromatteo, Angelique de Maison, Trish Malone, Kieran Kuhn, Peter Voustas, Ronald Loshin and six related entities. This pump and dump scheme, conducted last year, began when Izak de Mason formed Gepco in 2008 under a different name. Over the next five years the company engaged in a series of reverse mergers and frequently changed it claimed line of business. Mr. de Maison remained in the background but continued to control the company. Through a series of e-mails and text messages the defendants coordinated the manipulation of the company shares, increasing the price from $0.07 in October 2013 to $0.292 in March 2014 despite the fact that the company had virtually no assets or revenues. Eventually Mr. Cope’s nominee illegally sold over 2.5 million shares obtained in an illegal distribution. The huge trading profits that resulted were used to make payments to the Commission, ordered by the court earlier this year based on a 2001 fraud judgment. The case is pending. The U.S. Attorney’s Office brought a parallel criminal case. See Lit. Rel. No. 213087. (Sept. 18, 2014).
Undisclosed principal transactions: In the Matter of Strategic Capital Group, LLC, Adm. Proc. File No. 3-16138 (September 18, 2014) is a proceeding which names as Respondents the registered investment adviser and N. Gary Price, its controlling shareholder and CEO. The Order alleges that since May 2011 the adviser has engaged in more than 1,100 principal transactions through its affiliated registered broker dealer without providing the required prior written disclosure to the clients. The broker dealer purchased securities from other brokers and then resold them at higher prices to the adviser without disclosing for over a year the nature of the transactions. These transactions were also contrary to the adviser’s Form ADV which stated the firm did not engage in such transactions. In addition, the adviser provided prospective clients false advertisements regarding its performance model. Mr. Price, as CEO and CCO, failed to implement the adviser’s policies and procedures. The Order alleges violations of Advisers Act Sections 206(2), 206(3), 206(4) and 207. The firm resolved the matter, consenting to the entry of a cease and desist order based on the Sections cited in the Order and a censure. The firm also agreed to pay disgorgement of $368,459 along with prejudgment interest. The funds will be repaid to investors after the adviser submits a list to the staff. The firm will also pay a penalty of $200,000. Mr. Price consented to the entry of a cease and desist order based on Advisers Act Sections 206(4) and 207. He will pay a penalty of $50,000.
Misappropriation: In the Matter of Westend Capital Management, LLC, Adm. Proc. File No. 3-16129 (September 17, 2014); In the Matter of Sean C. Cooper, Adm. Proc. File No. 3-16130 (September 17, 2014). Westend is a registered investment adviser that employed Mr. Cooper. From March 2010 through February 2012 Mr. Cooper withdrew various amounts of money from the fund which eventually totaled $320,000 for his personal use. He booked the withdrawals as management fees. The adviser was charged with failure to supervise and not maintaining proper books and records. It resolved the proceeding by agreeing to a series of undertakings, including the retention of a compliance consultant and notifying clients of this proceeding. The firm also consented to the entry of a cease and desist order based on Advisers Act Sections 204, 206(4) and 207 and to a censure. The firm will pay a penalty of $150,000. The Order as to Mr. Cooper alleges violations of Advisers Act Sections 206(1), 206(2) and 207. The proceeding will be set for hearing.
Net capital: In the Matter of Latour Trading LLC, Adm. Proc. File No. 3-1612 (September 17, 2014) is a proceeding naming as Respondents high speed trading firm Latour Trading LLC and its former COO Nicolas Niquest. Latour is a New York based broker dealer. From January 2010 through December 2011 Latour consistently miscalculated the amount of its net capital. The net capital rule generally requires that a broker-dealer maintain a specific minimum of net liquid assets or capital. As part of the calculation the broker-dealer is required to make prescribed percentage deductions from the market value of its proprietary securities and other positions, referred to as haircuts. Failure to properly calculate the deductions can result in improperly inflating the broker’s net capital. In this case the firm used a commercially available program to calculate its haircuts. The program required a number of inputs from the broker. Mr. Niquet was primarily responsible for devising the approach that Latour used to calculate its haircuts in at least 2010 and 2011, although he did not have any experience in the area. The methodology used by Latour for its haircuts was rejected by the Commission when modifications were made to the rules. As a result Latour had significant net capital deficiencies on at least 19 reporting dates in 2010 and 2011. Those errors also caused the firm to make and keep inaccurate records and to file incorrect FOCUS Reports. The Order alleges violations of Exchange Act Sections 15(c)(3) and 17(a)(1) and the related rules. Respondents resolved the proceeding by each consenting to the entry of a cease and desist order based on the Sections cited in the Order. Latour also consented to the entry of a censure and agreed to pay a penalty of $16 million. Mr. Niquest agreed to pay a penalty of $150,000.
Rule 105: In the Matter of James C. Parsons, Adm. Proc. File No. 3-16127 (September 16, 2014) is an action against Mr. Parsons for violating Rule 105 regarding short selling within a designated window prior to an offering. It is one of 20 such actions filed, 19 of which named firms as Respondents. Each settled, paying disgorgement, prejudgment interest and a penalty with the exception of one firm that was not penalized based on financial condition. The sums paid totaled over $9 million.
Insider trading: SEC v. Braverman, Case No. 14 CV 7482 (S.D.N.Y. Filed September 16, 2014). For a period of three years, beginning in 2013, Dimitry Braverman is accused of trading on inside information obtained from Wilson Sonsini. As a senior IT employee Mr. Braverman worked on programing and maintaining software for the law firm and had access to client data and inside information on transactions. Prior to April 2011 Mr. Braverman is charged with trading on inside information in four deals in which Wilson Sonsini represented one of the parties. The trades were placed in his personal account in his name. In April 2011 the SEC charged a Wilson Sonsini lawyer with insider trading. Mr. Braverman then liquidated his remaining securities positions which were based on firm information. Two days later Mr. Braverman’s brother, who he tipped, liquidated his positions. About eighteen months later Mr. Braverman opened a new brokerage account in the name of a relative and Russian citizen and resident, Vitaly Pupynin. The e-mail address associated with the account initially was the same one he used to open other accounts. Later it was changed to one associated with Mr. Pupynin. From November 2012 through December 2013 he continued to trade on inside information obtained from the firm. Overall Mr. Braverman had trading profits of about $300,000. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). This action, along with the parallel criminal case, is pending.
Financial fraud: SEC v. AgFeed Industries, Inc. (M.D. Tenn.) is a previously filed action against the company and several directors. The firm is the product of a merger between a Tennessee firm and an entity in the PRC where most of its farms were located. The complaint alleges a massive financial fraud and the use of fraudulent financial statements in an offering. The firm, which is in bankruptcy, settled with the Commission, agreeing the entry of a permanent injunction prohibiting future violations of the antifraud, periodic reporting and record keeping and internal control provisions of the federal securities laws. It will also pay $18 million.
Kickbacks: SEC v. Henderson, Civil Action No. 11-cv-12116 (D. Mass. Dec. 1, 2011) is a previously filed action against Paul Desjourdy, the former President, CEO, CFO, treasurer and general counsel of Symbollon Pharmaceuticals, Inc. Mr. Desjourdy met with a representative of a hedge fund and entered into a kickback agreement in which the hedge fund would purchase $5 million of Symbollon stock in return for a kickback. The hedge fund representative was an undercover agent. Mr. Desjourdy settled with the SEC, consenting to the entry of a permanent injunction based on Exchange Act Section 10(b). He was ordered to pay disgorgement of $54,000. That amount was deemed satisfied by the forfeiture order in the parallel criminal case. The judgment also prohibits him from serving as an officer or director. In the parallel criminal case he was ordered to serve 18 months of probation and forfeit $54,000 after pleading guilty to one count of mail fraud and one count of conspiracy. See Lit. Rel. No. 23082 (Sept. 12, 2014).
Investment fund fraud: SEC v. Abatement Corp. Holding Company Limited, Civil Action No. 1:14-cv-2336 (S.D. Fla. Filed September 10, 2014) is an action against the company which was operated by the now deceased Joseph Laurer. Beginning in 2004 Mr. Laurer raised about $4.6 million from 50 investors. The funds were to be put in Abatement Corp. and invested in high grade corporate bonds. Investors were told they were guaranteed against loss by either the FDIC or SIPIC. By 2007 the fund became a pure Ponzi scheme. At the time of Mr. Laurer’s death earlier this year about $900,000 remained in the corporate bank account. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The Court granted a freeze order. The case is pending. See Lit. Rel. No. 23085 (Sep. 16, 2014).
Misleading advertising: The Australia Securities and Investment Commission fined Invast Financial Services Pty, Ltd. $20,400 for misleading advertising. The advertising suggested that investors could engage in risk free trading on a firm platform that was actually a demonstration; that a firm site regarding Forex trading improperly suggested that the investor was actually buying or selling the underlying asset; and that a firm e-mail regarding FX and derivatives stating that they were low risk was incorrect in view of the disclaimer which stated they were actually high risk.
Alert: The ASIC issued an alert warning consumers about a fake website promoting foreign exchange broker First Forex.
Due diligence: The Securities and Futures Commission withdrew approval for Eric Shum Kam Chi to act as a responsible officer of Sun Hung Kai International Ltd. for three years. The action was taken because he failed to properly supervise the examination regarding Sino-Life Group Ltd. for listing on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited. In conducting the inquiry he failed to determine the accuracy and completeness of the financial information, determine the existence of various encumbrances, properly assess the business of a subsidiary and determine if the firm kept proper books and records. Although he knew that information was only selectively disclosed in the application he executed it.
Conflicts: The Financial Conduct Authority banned and fined Peter Carron, formerly a senior partner at St. James’s Place Wealth Management Plc. £300,000. The FCA determined that he advised 11 clients to invest a total of £2.4 million in three companies of which he was a director and majority shareholder without adequately disclosing this fact to them. The clients lost about £2.2 million when the companies went into liquidation. The firm subsequently paid the clients about £1.9 million.