Companies with China based operations were a focus this
week for the SEC. The Commission filed two financial fraud actions against
companies whose operations were in the PRC. In one there seemed to be virtually
no operations while in the other two sets of books were used to falsify revenue
while proceeds of a securities offering were diverted to the use of the
chairman and the controlling shareholder. The SEC also concluded its "golden
goose" insider trading case, settling with the two remaining defendants. And,
another defendant in the Dell insider trading case was sentenced to prison.
The Commission prevailed in the Second Circuit which
affirmed the entry of an officer and director bar ordered by the district court
following the settlement of an insider trading case. The Circuit Court
declined, however, to adopt the SEC's proposed test for issuing such orders.
Testimony: Chair Mary Jo White
testified before the House Committee on Financial Services (May 16, 2013). The
testimony reviewed the recent work of the divisions in support of the
Commission's budget request (here).
Remarks: Commissioner Daniel
M. Gallagher addressed the 45th Annual Rocky Mountain Securities Conference,
Denver, Colorado (May 10, 2013). His remarks focused on the municipal
securities markets and recent, related enforcement actions (here).
Remarks: Commissioner Scott D.
O'Malia addressed the Energy Risk USA 2013 Conference (May 14, 2013),
delivering remarks titled "Dodd-Frank Regulatory Framework: What Questions
Remain Unanswered." Topics addressed include the large number of no-action and
exceptive orders, the cross-boarder rules, futurization, the Volker Rule and
data use (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 3 civil injunctive action and no administrative
proceedings (excluding tag-along-actions and 12(j) proceedings).
Cherry picking scheme: SEC v. Dushek (N.D.
Ill. Filed May 16, 2013) is an action centered on a cherry picking scheme by
the founder of an investment adviser and his son. The named defendants are
Charles J. Dushek, his son Charles S. Dushek, and the state registered
investment adviser, Capital Management Associates, Inc. From 2008 through 2012
the father and son team placed about 13,500 trades. Those trades were typically
not allocated to either their accounts or those of a client for periods which
ranged from a day to several days after the trade. Generally the profitable
trades went to the accounts of the father and son and the unprofitable ones to
the clients. Thus during the four year period here 75% of the trades for the
father and son were profitable yielding $2 million in profits. For the clients
only 25% were profitable yielding over $2 million in losses. For 17 consecutive
quarters during the four year period the father and son had positive returns in
their personal accounts at the time of allocation while the clients suffered
losses. The complaint alleges violations of Exchange Act Section 10(b) and
Advisers Act Sections 206(1) and (2). The case is in litigation.
Investment fund fraud: SEC v. Deer Hill
Financial Group, LLC, Civil Action No. 12-01317 (D. Conn.) is
a previously filed action against the advisory firm and its principal, Stephen
B. Blankenship. The complaint alleges that beginning in 2002 and continuing through
2011 the defendants misappropriated at least $600,000 from 12 brokerage
customers by falsely representing that their funds would be invested through
the advisory. The defendants settled with the Commission and the Court entered
a final judgment as to each prohibiting future violations of Exchange Act
Sections 10(b) and 15(a), Securities Act Section 17(a) and Advisers Act
Sections 206(1) and (2). In a related action Mr. Blankenship was barred from
the securities industry. In a parallel criminal case Mr. Blanenship previously
pleaded guilty and was sentenced to serve 41 months in prison, pay a fine of
$7,500 and make restitution in the amount of $607,516.81.
Financial fraud: SEC v. Rino International
Corp., Civil Action No. 1:13-cv-00711 (D.D.C. Filed May 15,
2013) is an action against the company whose operations are based in China,
Dejun "David" Zou, its founder and controlling shareholder, and Jianping "Amy"
Qiu, its chairman. The complaint, which alleges violations of Securities Act
Section 17(a) and Exchange Act Sections 10(b), 13(b)(5), 13(a), 13(b)(2)(A) and
13(b)(2)(B), states that the defendants inflated the revenues of the company
and diverted offering proceeds to the personal use of the individual
defendants. To implement part of the scheme the company had two separate sets
of books, one for China and one for the U.S. The revenue recorded in the latter
was 15 times higher than that in the former over about a two year period
beginning in early 2008. Following a December 2009 offering of securities,
portions of the proceeds were used to purchase a home, cars and other personal
items for defendants Zou and Qiu. To resolve the case each defendant consented
to the entry of a permanent injunction prohibiting future violations of the
provisions cited in the counts of the complaint applicable to them. Defendants
Zou and Qiu also agreed to pay penalties of $150,000 and $100,000 respectively
in addition to the $3.5 million they paid as disgorgement in the related class
action. The individual defendants also consented to the entry of an
officer-director bar for ten years.
Insider trading: SEC v. Devlin, Civil
Action No. 08-CV-11001 (S.D.N.Y.) is a previously filed action against, among
others, Jamil Bouchareb and Daniel Corbin and his related entities. They are
the last defendants in this case which was known as the "Golden Goose" action.
It centered on repeatedly trading on inside information misappropriated by
Matthew Devlin, formerly a Lehman Brothers, Inc., representative, from his wife
who was a partner in a public relations firm. She was known as the "golden
goose" among the group. The Court entered judgments which permanently enjoined
each of the remaining defendants from future violations of Exchange Act
Sections 10(b) and 14(e). Mr. Corbin was also ordered to pay disgorgement of
$164,515.50 along with prejudgment interest. Mr. Bouchareb was directed to pay
disgorgement of $921,082 along with prejudgment interest. The disgorgement
includes the trading profits of certain relief defendants. Previously, Messrs.
Bouchareb and Corbin each pleaded guilty to parallel criminal charges and were
sentenced to prison. The other defendants in the Commission's case previously
settled. See also Lit. Rel. No. 22700 (May 15, 2013)
Financial fraud: SEC v. Subaye, Inc., Civil
Action No. 13 Civ 3114 (S.D.N.Y. Filed May 13, 2013) is an action against the
corporation, a NASDAQ listed company whose operations were supposedly in the
PRC, and its former CEO James Crane, a Massachusetts CPA. From 2008 through
2010 the revenue of the company steadily increased as the description of its
main business dramatically shifted, according to the Form 10-K filed each year.
Eventually the exchange delisted the firm for failing to comply with the
listing standards and the PCAOB barred Mr. Crane from being an associated
person of a registered public accounting firm. Following Mr. Crane's
resignation, a new CEO was appointed who, upon investigation, determined the
company had virtually no assets or operations. The Commission's complaint
alleges violations of Exchange Act Section 10(b), 13(a), 13(b)(2)(A) and
13(b)(2)(B). The case is in litigation.
Investment fund fraud: U.S. v. Holcum (S.D.
Ca. Unsealed May 15, 2013) is an action which names Bradley Holcum as a
defendant. The indictment charges eight counts of mail fraud, four counts of
wire fraud and one count of securities fraud. It alleges that from 2004 through
2010 Mr. Holcum raised about $50 million from 150 investors who purchased
promissory notes in a real estate project. Investors were assured that they
would receive a first lien on the property which was to be developed. In fact
investor notes were not secured as promised and in some instances Mr. Holcum
sold the parcels of real estate without informing investors that the property
they had financed for development was gone. As his financial condition
deteriorated in 2008 Mr. Holcum continued to solicit investors. The case is
Insider trading: U.S. v. Newman, 1-12-cr-00121
(S.D.N.Y.). Anthony Chiasson, the co-founder of hedge fund Level Global
Investors, was sentenced on insider trading charges this week to serve 78
months in prison. Mr. Chiasson was convicted along with co-defendant Todd
Newman, a portfolio manager at Diamondback Capital Management LLC, by a jury last
December. Mr. Newman has been sentenced to serve 54 months in prison. The
charges were based on trading on inside information regarding the earnings
announcements of Dell Inc. and NVIDIA Corporation in 2008 and 2009. The SEC has
a parallel case pending. SEC v. Adondakis, Civil Action No. (S12-cv-0409
Court of Appeals
Officer/director bars: SEC v. Bankosky, Docket
No. 12-2943-cv (2nd Cir. Decided May 14, 2013). The Circuit Court
affirmed the issuance of a officer-director bar by the district court against a
corporate executive who settled an insider trading case. The ruling is based on
a settled case against Brent Bankosky of Takeda Pharmaceuticals International,
Inc. As the director of global licensing and later a senior director during the
period January 2008 through May 2011 he had access to inside information
regarding transactions in which the company was involved. Contrary to company
policy, Mr. Bankosky purchased call options in the shares of four entities
involved in deals with Takeda prior to the public announcement.
In March 2012 the SEC and Mr. Bankosky settled this
action which was based on the four trades. Without admitting or denying the
facts alleged in the complaint he consented to the entry of a permanent
injunction. He also agreed to pay disgorgement of $63,000, prejudgment
interest, and a civil penalty equal to the amount of the disgorgement.
Following the settlement the Commission moved for the imposition of an
officer-director bar. The district court granted the motion and imposed a 10
year bar, utilizing the test in SEC v. Patel, 61 F. 3d 137 (2nd
The Circuit Court affirmed. Officer-director bars are
provided for in Exchange Act Section 21(d)(2) which requires a finding that the
person who violated Section 10(b) is "unfit." That standard was written into
the Section in 2002 by the Sarbanes-Oxley Act. It lowered the standard from the
prior "substantial unfitness." On appeal the SEC argued that the bar should be
affirmed but that the Patel standard is no longer applicable because of
the change in the statute. The Commission contended that the six factor test
used by the Court in Steadman v. SEC, 603 F. 2d 1126 (5th
Cir. 1979), which govern the propriety of issuing injunctive relief, should be
considered. The Court concluded that the application of Patel is not
erroneous. If the conduct met the pre-amended statutory standard there can be
no doubt that the bar should issue under the new, lower standard the Court
reasoned. Furthermore, the test is flexible and no single factor is dispositive
or even mandatory. Likewise, other courts have continued to rely on Patel. The
Court declined to adopt the SEC's proposed standard.
The Australian Securities and Investment Commission filed
charges against Andrew Sigalla, a director of TZ Limited. Mr. Sigalla is allged
to have made 16 payments of company funds to himself over a one year period
beginning in March 2008. The payments totaled about $6.1 million and were used
largely to pay for his gambling debts. The case is pending.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in
Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA
members attending live in Washington who pre-register by sending an e-mail to
email@example.com). Webcast Nationally by the ABA. For further
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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