SEC Chairman Mary Schapiro continued to press Congress
for adequate funding which would permit the Commission to carry out its
statutory duties and avoid furloughs. At the same time the agency continues to
suffer through its latest scandal. This one relates to the investments by the
family of the Commission's former general counsel with Ponzi king Bernard
Madoff.
SEC enforcement this week focused on two of its staples, insider
trading and investment fund fraud actions. In addition, two more defendants
pleaded guilty to criminal charges stemming from the demise of Taylor Bean.
Finally, both FINRA and the PCAOB both issued warnings to investors. FINRA
cautioned against scams involving the sale of pre-IPO shares in social
networking companies like Facebook. At the same time the accounting board
expressed concern about Chinese companies that went public through reverse
mergers.
SEC Enforcement
Insider trading: SEC v. Carroll (W.D. KY. Filed March 17, 2011) is an
action involving family and friends who are alleged to have traded while in
possession of inside information about a pending take over. The complaint
centers on the acquisition of Steel Technologies, Inc. by Mitsui & Co.
which was announced on February 28, 2007. Following the announcement the share
price rose 60%. Defendants Patrick Carroll, William Carroll, David Stitt and
David Calcutt all held a position of vice president of sales at Steel
Technologies. Each reported to the company president and COO Michael Carroll.
Each vp is alleged to have had inside information regarding the acquisition as
did Michael Carroll who is not a defendant. Each vice president is alleged to
have traded while in possession of the information. Four individuals named as
defendants are alleged to be tippees. The are: James Carroll (son of Patrick);
John Monroe who is a friend of defendant Stitt; Stephen Somers who is a friend
of defendant and tippee John Monroe; and Christopher Calcutt, the brother of
defendant David Calcutt. Overall the four vice presidents purchased about
$339,000 of stock in those accounts. The tippees also traded and, collectively
the defendants had profits of about $320,000. The complaint alleges violations
of Exchange Act Section 10(b). The case is in litigation.
Looting: SEC v. Durham,
Civil Action no. 1:11-CV-0370 (S.D. Ind. Filed March 15, 2011) is an action
against Timothy Durham, former CEO of Fair Finance Co., James Cochran, former
Chairman of the Board of Fair, and Rick Snow, former CFO of Fair. According to
the complaint, Fair was an Ohio based consumer finance company. Following the
acquisition of Fair in 2002 defendants altered its historical operating methods
by steadily loaning Fair's funds to other failing businesses they controlled.
By 2009 the defendants had booked over $200 million of these related party
loans. Those loans constituted about 90% of Fair's supposed investments.
From 2005 through late 2009 defendants raised about $230
million from about 5,200 investors by selling investment certificates from
Fair. Defendants made false representations in connection with the sales not
disclosing that Fiar's investments were in largely to insolvent entities that
could not repay. The majority of the related parities did not even pay the
interest on the so-called loans. Eventually the defendants began making Ponzi
like payments to investors to repay notes due. The complaint alleges violations
of Securities Act Section 17(a) and Exchange Act Section 10(b). It is in litigation.
Parallel criminal charges were also filed against the defendants. U.S. v.
Durham, Case No. 1:11-cr-0042 (S.D. Ind. March 15, 2011).
Diversion of fund assets: SEC v. Juno Mother
Earth Asset management, LLC (S.D.N.Y. filed March 15, 2011) is an action
against Juno Mother Earth Asset Management, LLL, a registered investment
adviser, Eugenio Verzili, its chief compliance officer, and Arturo Rodrigues,
its portfolio manager and later chief investment officer. Beginning in late
2006 Juno offered investors securities in Resources Fund which it managed,
eventually raising about $16 million. Throughout that year and the next the
investment adviser raised about $16 million. Juno however was chronically short
of cash. Accordingly, in 2007 and 2008 defendants Verzili and Rodriguez made 41
withdrawals from the commodity and brokerage accounts of Resources Fund
totaling $1.8 million. Portions of the funds were used to pay Juno operating
expenses, contrary to representations in the PPM, while others were diverted to
the personal use of the individual defendants. By the middle of 2008
substantially all of the investors in Resources Fund sought redemption. Juno
ceased offering Resources Fund securities. The complaint alleges violations of
Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act
Sections 206(1), (2), (4), 203A and 207. The case is in litigation.
Insider trading: SEC v. Hollier,
Civil Action No. 6:09-cv-00928 (W.D. La.) is a previously filed insider trading
case against Robert Hollier and Wayne Dupuis. The Commission claimed in its
complaint that Mr. Hollier obtained inside information regarding the merger of
Warrior Energy Services Corporation and Superior Energy Services, Inc. The
transaction was announced on September 25, 2006. While on a hunting trip prior
to the announcement, Mr. Hollier told Mr. Dupuis about the then pending deal
according to the Commission. Following their return Mr. Dupuis purchased 5,000
shares of Warrior for $85,000. After the announcement he sold those shares at a
profit of about $41,800 when the share price rose almost 70%. This week the
case settled. Each defendant consented to the entry of a permanent injunction
prohibiting future violations of Exchange Act Section 10(b). The court ordered
the two defendants to jointly and severally pay disgorgement in the amount of
the trading profits along with prejudgment interest. Mr. Dupuis was all
directed to pay a civil penalty in the amount of the trading profits.
Disclosure: In the Matter of JSK Associates,
Inc.,
Adm. Proc. File No. 3-14296 (March 14, 2011) is a proceeding naming as
Respondents: JSK, a registered investment adviser; Jerome Keenan, the President
and Chief Compliance Officer of JSK and the Vice President and Chief Compliance
Officer of International Equity Services, Inc, a broker dealer; and Dos Santos,
an officer of JSK and IES. The Order alleges that JSK failed to inform
investors that IES was obtaining compensation from the JSK accounts at the
broker dealer. Investors were told that IES might receive clearing and
processing and other types of fees from the accounts but this was inadequate.
JSK also failed to inform investors that through IES it engaged in hundreds of
fixed income transactions involving mark-ups and mark-downs with advisory
clients on a principal basis. Finally, the firm failed to have adequate written
policies and procedures reasonably designed to prevent violations of the
Advisers Act. The Order alleges violations by Respondents of Advisers Act
Sections 206(2), 206(3), 204, 204A, 206(4) and 207. The matter was resolved
with consents to the entry of cease and desist orders as to each Respondent. In
addition, Respondents Keenan and Dos Santos each agreed to pay a civil penalty
of $10,000. Respondents also agreed to pay disgorgement of $60,350 along with
prejudgment interest. The Order acknowledges the prompt remedial efforts and
cooperation of Respondents.
Criminal cases
Fraud: U.S. v. Bowman
(E.D.Va.) is an action against Raymond Bowman, the former president of Taylor,
Bean & Whitaker. Mr. Bowman pleaded guilty to charges of conspiring to
commit bank, wire and securities fraud and of lying to federal agents about his
role in the fraudulent scheme that caused the demise Taylor Bean and Colonial
bank. Taylor Bean was the largest non-depository mortgage lender in the country
while its lender, Colonial BancGroup, Inc., was one of the fifty largest banks
in the U.S. The fraudulent scheme began with concealing from the bank the fact
that Taylor Bean, which had liquidity problems as early as 2002, was operating
essentially on overdrafts by shuffling funds among accounts and concealing its
true financial condition from the bank. Subsequently, Taylor Bean raised cash
by selling a package of fraudulent mortgages to Colonial that were carried on the
books of the bank. Finally, the one time mortgage lender created a special
purpose entity to obtain funds by selling asset backed loans. By August 2009
the entity had a collateral deficit of about $1.5 billion. Yet Taylor Bean
caused Colonial and the Federal Home Loan Mortgage Corporation to believe that
each had an undivided interest in thousands of loans worth hundreds of millions
of dollars. This was false Mr. Bowman admitted in his plea. Eventually Taylor
Bean collapsed. Colonial was seized by banking regulators. The date for
sentencing has not been set.
Fraud: U.S. v. Kelly
(E.D. Va.) is another criminal action based on the collapse of Taylor Bean. The
defendant is Teresa Kelly, a former supervisor in Colonial bank's Mortgage
Warehouse Lending Division. Ms. Kelly pleaded guilty to conspiring to commit
bank, wire and securities fraud based on her role in the scheme outlined above.
The SEC also filed a parallel civil case. The date for sentencing has not been
set.
FCPA
U.S. v. Tesler,
H-09-098 (S.D.Tx.). British solicitor Jeffrey Tesler pleaded guilty to one
count of conspiracy to violate the FCPA and one count of violating the FCPA.
The indictment, which contains eleven counts, centers on FCPA violations in
connection with the TSKJ consortium and the EPC contracts to build liquefied
natural gas facilities on Bonny Island, Nigeria. In his plea agreement Mr.
Tesler admitted that he served as an agent of the TSKJ consortium, formed to
secure $6 billion in contracts relating to the Bonny Island project. The
members of the consortium were KBR, Technip S.A., Snamprogetti Netherlands BV
and a Japanese engineering and construction company.
To facilitate obtaining the contracts, according to the
plea agreement, Messrs. Tesler, through a company he controlled, funneled
millions of dollars in bribes to Nigerian government officials. As part of the
plea arrangement Mr. Tesler agreed to forfeit $148,964,568.67 which may be the
largest FCPA forfeiture order against an individual. He is now cooperating with
the government. Sentencing is set for June 22, 1011. KBR, Technip and
Snamprogetti previously resolved FCPA charges.
FINRA
FINRA issued a warning to investors regarding the sale of
pre-IPO shares in social media entities such as Facebook. While most sales of
such shares are legitimate the regulator cautioned that there are scams
involving the sale of shares in social media companies. The release notes that
the SEC recently settled an action involving a scam in which investors paid
several million dollars for shares of Google, Facebook and other well known
sites.
PCAOB
The Board issued its first "Research Note" regarding
Chinese reverse mergers. The Note states that some U.S registered accounting
firms may not be conducting audits of companies with operations outside of the
U.S. in accord with PCAOB standards. The Board is currently prevented from
conducting inspections of U.S. related audit work of PCAOB registered firms in
the PRC. There has however been a significant number of reverse mergers
involving companies in that country. From January 2007 through the end of March
2010 there were 159 reverse merges involving Chinese companies. This compares
to 56 IPOs for companies from that region. Following the reverse merger two
thirds of the companies had a market capitalization below $75 million according
to a PCAOB study. In contrast, over three quarters of those companies which had
conducted an IPO had a market capitalization above $75 million. Similarly, as
of March 31, 2010 the total market capitalization of all the Chinese companies
involved with a reverse merger was less than half that of the companies that
conducted an IPO. PCAOB registered accounting firms based in the U.S. audited
74% of the Chinese firms involved in a reverse merger.
For more news involving securities issues, visit SEC Actions, a blog by Thomas
Gorman
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