In a holiday shortened week, the SEC filed actions based on the malfeasance at a transfer agent, financial fraud, insider trading and investment fund fraud. The action involving the transfer agent stems from an inspection and admissions by the principal of the firm while the financial fraud case originated from discoveries by the company board and a restatement. The insider trading case is one of a series based on the acquisition of an insurance agency. In the investment fund fraud case orders were entered on filing freezing the assets and partially resolving the action.
This week the first person was sentenced to prison under the Canadian Corruption of Foreign Public Officials Act. A corporate agent was sentenced to serve three years in an action where the company did not secure the contract and there was no evidence cash was paid as a bribe but the company funds furnished to the person could not be found.
Finally, in the U.K. Barclays and one of its traders were fined for market manipulation. In this instance the action centered on the gold fixing.
Remarks: Commissioner Daniel M. Gallagher addressed the Municipal Securities Rulemaking Board’s 1st Annual Securities Regulator Summit, Washington, D.C. (May 29, 2014). His remarks included a discussion of debt financing, riskless principal transactions, best execution, pension and other post-employment benefit obligations and recent reforms that have improved pension disclosures (here).
Remarks: Acting Chairman Mark P. Wetjen addressed the Derivatives, Securitization and Project Finance Committee of the DC Bar’s Corporation , Finance and Securities Law Section (May 29, 2014). His remarks included comments on the work of the agency in continuing to implement Dodd-Frank end user issues and cross boarder regulation (here).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 4 civil injunctive actions, DPAs, NPAs or reports and 0 administrative proceedings (excluding follow-on and Section 12(j) proceedings).
Investment fund fraud: SEC v. Oliver, Civil Action No. 2:13-14047 (S.D. Fla.) is a previously filed action against Richard and Susan Oliver, operators of We The People, Inc., and its former in-house counsel, William Reeves. The action alleged that the husband and wife defendants defrauded seniors through a purported charitable organization. The Court approved a settlement with Richard and Susan Olive in which each will be enjoined from future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Mr. Olive will pay disgorgement of $1,054,131 and a penalty equal to that amount. Ms. Olive will pay disgorgement of $45,655 and a penalty of $150,000. In a separate administrative proceeding the couple will be barred from the securities business or participating in any penny stock offering. The Commission determined not to seek a penalty against Mr. Reeves because of his significant assistance in the case. See Lit. Rel. No. 23009 (May 29, 2014).
Investment fund fraud: SEC v. Goyal, Civil Action No. 1:14-cv-03900 (N.D. Ill. Filed May 28, 2014) is an action against Neal Goyal and his two firms, unregistered investment advisers Caldera Advisors, LLC and Blue Horizon Asset Management, LLC. Beginning in 2006 the defendants raised about $11.4 million from investors supposedly for trading using a “long short” strategy. In fact the little trading conducted lost money and Mr. Goyal essentially operated a Ponzi scheme, covering losses by using investor money to make payments and providing investors with false documents. The Commission’s complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The defendants consented to the entry of permanent injunctions by the Court based on the Sections cited in the complaint. Other remedies will be considered at a later date. The Court also granted the Commission’s request for a freeze order. Parallel criminal charges were filed by the U.S. Attorney’s Office for the Northern District of Illinois on May 28, 2014. See Lit. Rel. No. 23008 (Dated May 23, 2014, published May 29, 2014).
Misappropriation: SEC v. Pearson, Civil Action No. 14 C 3785 (N.D. Ill. Filed May 22, 2014) is an action against Illinois Stock Transfer Company or IST and its president and sole owner, Robert G. Pearson. ITS provides transfer agent and registrar services to approximately 130 issuers. In October 2013 the staff conduced an examination of the firm. During that examination the staff reviewed a firm account at BMO Harris Bank. Since the bank records for the Harris Bank account were not available, Mr. Pearson furnished them to the staff in early 2014. Those records revealed several transactions that appeared to relate to payroll. When asked about those transactions Mr. Pearson eventually admitted that in fact payroll was in part funded from the account, although he initially offered an alternate explanation. After securing counsel, Mr. Pearson produced two schedules showing that he had diverted about $1.3 million in client funds to other uses. He explained that the firm, which had not filed tax returns for years, could not meet its financial obligations and that he intended to repay the disbursements. The complaint alleges violations of Exchange Act Section 10(b) and Rules 10b-5(a) and 10b-5(c). It also alleged violations of Exchange Act Section 17A(d)(1) and Rules 17Ad-12, 17Ad-13, 17Ad-16 and 17f-1 and aiding and abetting under Exchange Act Section 20(e). The Court entered a freeze order. The case is pending. See Lit. Rel. No. 23007 (May 28, 2014).
Offering fraud: SEC v. Inofin, Inc., Civil Action No. 1:11-CV-10633 (D. Mass. ) is a previously filed action against the firm, three of its executives, including former COO Melissa George, and two salesmen. The complaint alleged that about $110 million was raised from investors in 25 states and the District of Columbia through the fraudulent sale of unregistered notes. This week the Court entered a final judgment by consent against Ms. George, imposing a permanent injunction against future violations of Exchange Act Section 10(b) and Securities Act Sections 5 and 17(a). In addition, Ms. George was ordered to pay disgorgement of $25,157.36, prejudgment interest and a civil penalty of $150,000. See Lit. Rel. No. 23006 (May 28, 2014).
Financial fraud: SEC v. DGSE Companies Inc., Civil Action No. 14-1909 (N.D. Tx. Filed May 27, 2014) is an action against the firm and its former CFO, I. John Benson. In early 2012 the Board of Directors determined that there were certain accounting irregularities which might impact reported financial information. After announcing that its financial statements beginning with the second quarter of 2007 should not be relied on, it launched an investigation which found: Many unsupported and/or improperly-described accounting entries; no standard, formalized process for reconciling intercompany accounts; unsupported entries were recorded directly into the general ledger; there was a lack of regular inventory counts matching the general ledger; no audit trail with which to identify the reason for accounting adjustments; and there was no backup of the accounting data. As a result the accounting systems of the firm were compromised and the inter-company accounts were out of balance by millions of dollars. Mr. Benson had made a number of fraudulent accounting entries to bring the general ledger back into apparent balance. Those included ordering the preparation of adjusting entries to the general ledger and overstating the inventory by millions of dollars. He also executed a false management letter to the auditors and misleading public filings and management certifications. As a result of its internal investigation, and additional work performed by accountants retained by the firm, DGSE restated its financial statements in its Form 10K-A, filed December 19, 2012. The firm also undertook an extensive series of remedial actions. The Commission’s complaint charges the company with violations of: Securities Act Section 17(a)(2) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Mr. Benson was charged with violations of Exchange Act Sections 10(b) and13(b)(5) and with aiding and abetting violations of Sections13(a), 13(b)(2)(A), 13(b)(2)(B) and certain related rules along with each subsection Securities Act Section 17(a). DGSE resolved the charges, consenting to the entry of a permanent injunction prohibiting future violations of each Section with which it was charged. The firm was also required to appoint an independent consultant to review its accounting controls and to take the necessary remedial steps to correct any deficiencies. Mr. Benson also settled the charges, consenting to the entry of a permanent injunction prohibiting future violations of the Sections with which he was charged. In addition, he is permanently barred from serving as an officer or director of a public company and is denied the privilege of appearing or practicing before the Commission as an accountant. Mr. Benson is also required to pay a penalty of $75,000. See Lit. Rel. No. 23003 (May 27, 2014).
Unregistered sale of securities: SEC v. Gendarme Capital, Corporation, Civil Action No. 2:11-CV-053 (E.D. Cal.) is a previously filed action against the firm, its former principal, Ezat Rahimi and its former attorney, Cassandra Armento. The complaint alleged that the defendants offered and sold the securities of several issuers without a filed, or effective, registration statement. This week the Court approved settlements under which each defendant was permanently enjoined from future violations of Securities Act Section 5 and from participating in the issuance, offer or sale of any security in an unregistered transaction except for purchases and sales of exchange-traded securities for their own, personal accounts. The action was dismissed as to former defendant Ian Lamphere who passed away in 2013. See Lit. Rel. No. 23005 (May 28, 2005).
Insider trading: SEC v. Drewery, Civil Action No. 5:14-cv-00299 (E.D. N.C. Filed May 27, 2014) is an action against Ronald Drewery centered on the acquisition of Mercer Insurance Group, Inc., announced on November 19, 2010. Prior to that announcement Mr. Drewery misappropriated material non-public information regarding the transaction from a director and purchased 3,500 shares of the firm’s stock. Following the deal announcement the price rose, closing up 48% over the prior day’s close. Mr. Drewery had trading profits of $35,730. The Commission’s complaint alleges violations of Exchange Act Section 10(b). Mr. Drewery agreed to resolve the action, agreeing to disgorge his trading profits and pay prejudgment interest and a penalty equal to his trading profits. This is the fourth action brought by the agency based on this take-over transaction. See Lit. Rel. No. 2304 (May 27 2014).
FCPA – Corruption
Canada: Nazir Karigan, formerly an agent for Cryptometrics Canada, became the first person sentenced to prison under the Corruption of Foreign Public Officials Act. He was convicted of attempting to bribe an official from Air India regarding the supply of biometric facial recognition security technology. Mr. Karigarn provided Cryptometrics with a spread sheet showing the bribes. The U.S. parent of the firm transferred U.S. $200,000 to Mr. Karigar’s account which he claimed would be used only to ensure that the firm qualified for a public tender. Under a later agreement an additional U.S. $250,000 would be transferred to obtain the Indian Minister of Civil Aviation’s approval for the bid. The company did not obtain the contract. There is no evidence the bribe was paid or regarding the whereabouts of the money. Mr. Karigan, 67 years of age, was sentenced to serve three years in prison. The maximum at the time was five years. It has since been increased to fourteen years.
Alert: The regulator issued a new investor alert titled “High-Yield CDs: Red Flags That Signal a Scam” (here).
Misleading statements: Ng Kai Shing was convicted of proving false information on two licensing applications furnished to the Securities and Futures Commission. Specifically, in two instances in applications with the regulator he represented that his firm, Hong King Securities Holdings Limited, had liquid capital and paid-up share capital in amounts sufficient to meet requirements. In fact it did not. The funds were transferred in at the time of the application and then immediately transferred out. He was fined $40,000.
Accounting records: The Securities and Futures Commission obtained a court order directing accounting firm EY to produce certain records for its former audit client, Standard Water Limited, which is listed on the exchange. EY had been the auditors of the firm since its listing but recently resigned upon discovery of certain inconsistencies in documentation furnished by the company. Standard Water then withdrew its listing application. The auditors declined to produce the records, claiming it was not in possession of the papers and that, in any event, PRC law restricted their production. The Court, in a ruling of first impression, rejected EY’s claims and ordered the papers produced.
Manipulation: The Financial Conduct Authority fined Barclays £26,033,500 million and banned one of its traders in addition to imposing a fine on him of £95,600. The sanctions resulted from actions taken in connection with the gold fixing on June 28, 2012. That occurs at 3 p.m. On that date if the price was above a specific level, the bank would owe one of its clients a substantial sum; if below then it would not. Trader Daniel Plunkett executed certain trades in such a manner that the price would be below, thereby depriving the customer of the payment but adding to the overall profits of his trading book. By taking that action he put his interests and those of the bank ahead of the customer, according to the FCA. The trader later tried to cover-up the transaction with misstatements. The bank failed to have adequate systems to supervise Mr. Plunkett.