The recent NASDAQ outage was a key focus this week. The SEC held a meeting attended by the leaders of the securities and options exchanges, FINRA, DTCC and the Options Clearing Corporation. At its conclusion the SEC Chair gave the participants a homework assignment: Come up with a list of concrete measures to address specific issues were market systems can be improved. Earlier this week the CFTC issued a concept release soliciting comments on risk controls and system safeguards for automated trading.
The Commission filed another Reg FD action this week which in part emphasizes the impact of cooperation. In addition, two offering fraud cases were brought.
Remarks: Norm Champ, Director, Division of Investment Management, addressed the PLI Hedge Fund Management Conference, New York, New York (Sept. 12, 2013). His remarks covered the lifting of the general solicitation ban, the bad actors provisions and recent outreach efforts (here).
Concept release: The agency issued a concept release titled Risk Controls and System Safeguards for Automated Trading (here). The Release seeks comments regarding risk controls related to automated trading.
Testimony: Chairman Gary Gensler testified before the House Committee on Oversight and Government Reform (Sept. 10, 2013). His testimony focused on his use of government and personal e-mail and a new agency policy (here).
SEC Enforcement: Filings and settlements
Filings this week: This week the Commission filed 4 civil injunctive actions and 1 administrative proceeding (excluding follow-on actions and 12(j) proceedings).
Misappropriation: SEC v. Marshall, Civil Action No. 1:13-CV-3032 (N.D. Ga. Filed Sept. 11, 2013) is an action against Paul Marshall, a state registered investment adviser representative, and three entities he controlled, Bridge Securities, LLC, Bridge Equity, Inc. and FOGFuels, Inc. The complaint alleges that since 2011 Mr. Marshall misappropriated about $2 million from clients by convincing them to transfer funds to accounts he controls. He also misappropriated $100,000 from an investor in FOGFuels, purportedly an alternative fuels company. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). An emergency freeze order was secured by the Commission at the time the case was filed. The action is pending. See Lit. Rel. No. 22797 (Sept. 12, 2013).
Financial fraud: SEC v. True North Finance Corp., Civil Action No. 10-cv-3995 (D. Minn.) is a previously filed action against the company and its CFO, Owen Williams. The Commission’s complaint alleged that the revenue of the company was overstated because it improperly included interest from borrowers who were not paying and the collectability of the underlying debt was not reasonably assured. The defendants resolved the action this week, consenting to the entry of final judgments prohibiting future violations of Securities Act Section 17(a)(2) and Exchange Act Sections 13(b)(2)(A), 13(b)(5) and 15(d). Mr. Williams also agreed to pay a civil penalty of $40,000. See Lit. Rel. No. 22796 (Sept. 11, 2013).
Offering fraud: SEC v. Elrod, Civil Action No. 13-CV- 02449 (D. Col. Filed Sept. 9, 2013) is an action which names as defendants Brian Elrod and Nova Pack. Over an eight month period beginning in March 2007, Mr. Elrod, aided by defendant Pack who acted as an unregistered broker, raised over $2 million from 12 investors who purchased promissory notes. Investors were assured that their money was secure. The funds were supposed to be used to expand a group of finance companies. Above average returns of 12% to as much as 24% would flow to the investors, according to the claims of the defendants. In fact, much of the money went to the defendants. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). Each defendant settled, consenting to the entry of a permanent injunction. The Order as to defendant Elrod prohibits future violations of each of the Sections cited in the complaint except Exchange Act Section 15(a). He also agreed to pay disgorgement of $1,720,491, prejudgment interest and a penalty equal to the amount of the disgorgement. The Order as to defendant Pack prohibits future violations of Exchange Act Section 15(a) and requires the payment of disgorgement in the amount of $171,500 along with prejudgment interest. Payment, along with a penalty, was waived based on financial condition. See Lit. Rel. No. 22794 (Sept. 9, 2013).
Offering fraud: SEC v. Projaris Management, LLC, Civil Action No. 1:13-cv-00849 (D.N.M. Filed Sept. 9, 2013)is an action against the management company, its founder Joe Lawler, his four sons, an employee of the management company, Pamela Hass and Victory Partners Financial. In this case about $1.4 million was raised from investors over approximately four years beginning in May 2008. Investors were told their funds would be part of a pooled investment. Funds would be used to purchase metals, commodities and real estate. The pool would also invest overseas. In fact about $835,000 of the investor funds was never invested. Rather, the money was diverted to the defendants. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a)(1) and 17(a)(2) and Exchange Act Sections 10(b) and 15(a). The case is in litigation. See Lit. Rel. No. 22793 (Sept. 9, 2013).
Reg FD: In the Matter of Lawrence D. Polizzotto, Adm. Proc. File No. 3-15458 (Sept. 6, 2013) is a proceeding against the former head of investor relations for First Solar, Inc. In June 2011 the company received conditional commitments from the DOE regarding about $4.5 million in loan guarantees related to three projects, one of which was Topaz Solar. Subsequently, at an investor conference the company CEO expressed confidence that First Solar would receive the three guarantees. Mr. Polizzotto was present. Two days later, DOE informed First Solar that it would not provide a guarantee for the Topaz project which was the largest of the three. The company began working on a press release to disclose this fact. When Mr. Polizzoto learned on the morning of September 21 that the Topaz press release would not be issued until the next day, he drafted Topaz related talking points. They were delivered to over 30 analysts that day. The points indicated that it was highly probable the company would receive guarantees for two projects but less likely that one would be secured for Topaz and emphasized other negative information about that project. Mr. Polizzoto also told at least one analyst and one institutional investor that if they wanted to be conservative they should assume there would not be a guarantee for Topaz. The next morning First Energy issued its Topaz press release prior to the opening of the market. The shares of the company opened down 6%. The Order alleges that Mr. Polizzoto caused a violation of Exchange Act Section13(a) and Regulation FD. Mr. Polizzoto resolved the proceeding by consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to pay a penalty of $50,000. The Commission determined not to charge the company as a result of its cooperation.
Prime bank fraud: SEC v. Butts, Civil Action No. 13-23115 (S.D. Fla. Unsealed Sept. 9, 2013) is an action against attorney Bernard H. Butts, Jr. who acted as an escrow agent, and Fotios Geivelis, Jr. and his financial services firm Worldwide Funding III Ltd. as well as others. The complaint alleges that the defendants raised about $3.5 million from 45 investors by promising them enormous returns from certain bank instruments in return for their initial deposit. Those funds would remain secure in an escrow account of Mr. Butts until the instruments arrived. In fact almost as soon as the funds were deposited, they were distributed to the defendants. The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The Commission obtained an emergency freeze order. The case is pending. See Lit. Rel. No. 22792 (Sept. 9, 2013).
Investment fund fraud: U.S. v. Alexander, No. 5:10-cr-00730 (N.D. Cal. Verdict Sept. 3, 2013). Michael Swanson was convicted of one count of conspiracy to commit mail and wire fraud, twelve counts of mail fraud, fourteen counts of wire fraud and one count of securities fraud,. He was acquitted on one count of mail fraud and one count of securities fraud. The charges are based on the fact that he was a partner in the management of investment company APS Funding, Inc. which solicited investors for a cluster of affiliated funds from 2007 through 2009. The $5 million in investor funds raised was to be used for making short term, high interest loans for business and real estate development. Contrary to those claims, about 90% of the investor funds were diverted to the personal expenses of the firm’s partners, including Mr. Swanson. Sentencing is scheduled for December 18, 2013.
The Securities and Investments Commission announced that Simon Charles Clarke pleaded guilty to two charges of managing a corporation while disqualified. The charges stem from that fact that in April 2009 Mr. Clarke was convicted of violating the former Trade Practices Act. As a result he was automatically disqualified from managing a corporation for five years. The defendant was fined $3,000 and ordered to perform a community correction order for 24 months.
Client procedures: The Securities and Futures Commission banned Koo Yiu Chee from the securities business for eight months. The agency concluded that Mr. Chee , while an account executive of CES in Senzhen, acted contrary to the requirement that he know his client and also failed to explain the risk disclosure statements to them and to witness the execution of the account opening documents. Mr. Chee utilized middlemen to solicit and sign-up clients and did not meet with them.